There is no commonly accepted definition of shadow inventory. This creates a great deal of confusion, and as a result, many casual observers dismiss it as an unreal bogeyman. It’s out of sight, so it’s out of mind.
CoreLogic has the most widely accepted definition of shadow inventory, but it’s wrong, and their numbers under report the actual figures. CoreLogic, counts visible bank-owned inventory and borrowers who have been served notice. These properties are visible, and although they may not be on the MLS yet, they are not hiding in the shadows. The real shadow inventory is the total number of delinquent mortgage holders who haven’t been served notice. These people aren’t picked up on any foreclosure reports because they haven’t entered the system yet. CoreLogic’s estimate of this number is based on self-reported databases, and lenders are not making a full and accurate accounting to CoreLogic.
Keith Jurow noted that New York has significantly more shadow inventory than is widely reported:
Through sheer persistence, I obtained accurate statistics on serious delinquencies from the New York State Division of Banking. Let me explain.
In late 2009, the NYS legislature passed a law requiring all servicing banks in the state to send a “pre-foreclosure” notice to all delinquent owner occupants. It warned them of possible foreclosure and explained steps they could take to prevent this. These servicing banks were also required to report to the Banking Division all notices that were sent.
Rather than allowing delinquent borrowers to remain hidden in shadow inventory, State law in New York requires every delinquent borrower be noticed. If these numbers were widely reported, there would be no inventory in the shadows, and we would all know how bad the problem really is.
The Division published preliminary figures in October 2010 but has never updated these numbers.
… Through the end of March 2012, a total of 192,000+ pre-foreclosure notices had been sent to delinquent owners in NYC. This does not include delinquent investor-owned properties because the law did not require servicers to send notices to them. There are lots of 2-3 family homes in the four outer boroughs of NYC. I estimate that there are roughly 75,000+ delinquent investor-owners.
This means there are roughly 265,000 seriously delinquent homeowners in NYC who have not yet been foreclosed. Why so many? The banks do not foreclose in NYC. As of May 24, foreclosure.com reported a total of 301 foreclosed properties on the active MLS and 103 in Brooklyn. Together, these two boroughs have a total of 4.7 million residents. …
Hard as it may be to believe, the situation is even worse on Long Island. With fewer than 3 million occupants, Nassau and Suffolk Counties showed a total of 175,000 pre-foreclosure notices sent out as of the end of March.
Just in the New York city metro area and surrounding areas, there are over 400,000 borrowers not paying their mortgages, and almost none of these people have been served a notice of default which is when services like Realtytrac would pick them up. CoreLogic would have us believe that there are less than a million seriously delinquent loans in the whole country (see red below). Does this make sense to you?
The way I have been measuring shadow inventory is to look at overall delinquency rates and subtract the number of homes in visible inventory from Realtrytrac or Foreclosure Radar. In the post, 8.7 years to clear Orange County distressed inventory at stable liquidation rate, I set out to measure the number of true shadow inventory homes as follows:
According to a recent report in the OC Register, 5.5% of Orange County mortgages are more than 90 days delinquent. This is the most serious delinquency category as most borrowers who go more than 90 days delinquent never recover. They are the typical delinquent mortgage squatters waiting for the bank to get around to booting them out.
A serious delinquency rate of 5.5% is about seven times the historic norm of about 0.75%
According to the US Census Bureau, there are 1,048,907 housing units in Orange County as of 2010. Of those, 33.7% are multi-family units. That leaves 66.3% as either attached or detached single-family homes. That amounts to nearly 700,000 houses in Orange County (10,48,907 * 66.3% = 695,425). It doesn’t matter if these are owner-occupied or rental units as either one could have a delinquent loan associated with it.
According to the American Home Survey, there are 462,761 housing units in Orange County with a mortgage on it. That means 66.5% have mortgages, and 33.5% are owned free-and-clear.
If there are 462,761 mortgage in Orange County, and if 5.5% of those are more than 90 days delinquent, then there are 25,451 delinquent mortgage squatters in Orange County. We can assume these have been served notices, so if all 11,078 are subtracted, then there are still 14,373 waiting in shadow inventory.
With the slowdown of foreclosure processing, not much has changed since that post was written. However, I do have one more data point to verify these numbers. Youwalkaway.com has been assisting clients strategically default on their mortgages over the last few years. They have an extensive database of clients all over the country. These clients represent a large random sample of delinquent borrowers providing a good sample set for statistical analysis. They data shows that the number of delinquent borrowers is much larger than the visible inventory picked up by Foreclosure Radar because many of these borrowers have not been served a notice of default. In California, for every four delinquent borrowers we know about, there are six hiding in shadow inventory.
Based on its database, YouWalkAway.com foresees an inevitable decrease in property values due to backlog and delays in processing foreclosures.
The foreclosure agency said that 40 percent of its client base comes from California and Florida. In these states, the years’ worth of backlog building up could ultimately be detrimental to the regions’ housing markets, the agency said.
For example, in Florida, 45 percent of YouWalkAway.com clients are in pre-foreclosure status, and on average, they are 17 months past due and still have not received their first formal foreclosure notice.
In California, 59 percent of the agency’s clients are in pre-foreclosure status, and on average, they are 15 months behind and still haven’t received a foreclosure notice.
59%. That means for every 4 borrowers we see, there are 6 in shadow inventory. That is approximately the ratio I measured above in my previous work on Orange County’s shadow inventory.
“Eighty-five percent of the homeowners we’re working with are in pre-foreclosure and have not made a mortgage payment for an average of 14 months,” said YouWalkAway.com CEO Jon
Maddux. “It is astounding to realize these numbers haven’t been reported by other foreclosure monitoring services, because these homeowners aren’t technically in foreclosure. This data points to significant backlog, eventual foreclosure activity and predicts a drop in value for home prices. “
That’s the shadow inventory I am trying to measure. These people haven’t been reported, and the only way we know they are there is because the delinquency rates do not match the foreclosure notices. Jon Maddox has just confirmed this to be true.
According to the agency’s database, states such as Minnesota, North Carolina, Maryland, and Texas may also face a wave a foreclosures, which will depress home prices. In those states, more than 80 percent of the agency’s clients reported they are, on average, about 14 months behind, but still not in foreclosure.
“Unfortunately new homeowners and investors may see a significant devalue of their properties due to the substantial amount of shadow inventory. The longer it takes to begin the foreclosure and process the property through the system, [the] longer it will take for housing market recovery,” said Maddux.
According to the agency, the current delays in foreclosure processing combined with the volume of shadow inventory indicates the road to recovery may be longer than what has been assumed.
States with the highest % of clients not in foreclosure, average months delinquent
Minnesota (96%) 12 months
North Carolina (88%) 13 months
Maryland (88%) 19 months
Texas (85%) 16 months
Oklahoma (84%) 8 months
Washington (79%) 13 months
Nevada (79%) 13 months
Georgia (75%) 12 months
Michigan (73%) 18 months
Virginia (72%) 18 months
Those numbers are staggering. In Minnesota, there are 25 delinquent borrowers for each one that’s been reported? Wow! Nevada recently passed a law making it much more difficult to foreclose, so the huge backlog of those who have been served is not being processed, and the even larger backlog of those who haven’t been served notice gets to continue their free ride. There are 21,000 people in Nevada who have been served notice. That means there are another 80,000 who also aren’t paying and who haven’t been served notice. Last month they processed about 350 foreclosures. At that rate, it will take them 24 years to process those who are currently delinquent on their mortgages.
Orange County Shadow Inventory
Three months ago when I wrote 8.7 years to clear Orange County distressed inventory at stable liquidation rate, there were fewer properties which had received notices. Notices of default have risen somewhat over the last three months. The total number of noticed properties in visible pre-foreclosure inventory is 12,718. Assuming this is about 40% of the actual number not paying their mortgage based on the data from youwalkaway.com, then there are another 19,077 who have not received a notice yet.
Lenders have continued to reduce their holdings of REO, but even with the reductions, they are still holding 80% of their REOs off the MLS. Lenders could easily release more of their inventory to satisfy demand, but they are choosing not to in hopes of making buyers pay more for their REO.
Current versus future inventory
Current MLS inventory is very small, and the rate at which banks are processing foreclosures foretells an ongoing lack of foreclosure inventory. In Orange County, lenders sell about 350 REO per month, and lately they have been taking fewer and fewer back at auction to draw down their standing inventory of 3,045 REOs. Lenders also approve about 650 short sales each month, but those short sales do not necessarily chip away at the delinquent inventory as many of these sales are underwater loanowners who are current on their mortgage when they sell (There are 102,000 underwater loanowners in Orange County). In fact, the vast majority of delinquent loanowners in shadow inventory do not list their homes for sale. Instead, they are opting to squat until their foreclosure.
So how are the banks going to deal with all these people in shadow inventory? From all appearances, their current plan is to amend-extend-pretend until prices come back. The super low interest rates have made prices affordable, and provided significant room for some markets to appreciate before affordability becomes a limitation. It seems unlikely the banks will flood the MLS with product considering they haven’t over the last 5 years, and it’s also unlikely that a deluge of short sale listings will hit the market since the incentives favor either waiting or squatting. Perhaps the banks can pull it off, but the sheer volume of these unprocessed bad loans is certainly a cause for concern.
That last loan did it
The former owner of today’s featured property was a measured Ponzi. He did slowly and consistently increase his mortgage, but he didn’t go wild until late in the housing bubble. He probably could have managed the small-time HELOC abuse, but he went all-in at the peak in 2006, and the size of the mortgage was finally his undoing.
- This property was purchased on 7/20/1994 for $143,000. The owner used a $114,400 first mortgage and a $29,600 down payment.
- On 5/7/2001 he refinanced with a $125,000 first mortgage.
- On 5/8/2003 he refinanced with a $148,900 first mortgage.
- On 1/24/2005 he refinanced with a $185,000 first mortgage.
- Finally, on 5/1/2006 he refinanced with a $318,000 first mortgage. He couldn’t afford it.
He got away with $205,000 for his trouble, but after living in this property for 18 years, he became a foreclosure statistic.
Buena Park Overview
Median home price is $327,000. Based on a rental parity value of $481,000, this market is under valued.
Monthly payment affordability has been worsening over the last 1 month(s). Momentum suggests unchanging affordability.
Resale prices on a $/SF basis increased from $233/SF to $233/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $25 last month from $1,941 to $1,966.
Rents have been rising for 9 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 8
$289,900 …….. Asking Price
$143,000 ………. Purchase Price
7/20/1994 ………. Purchase Date
$146,900 ………. Gross Gain (Loss)
($11,440) ………… Commissions and Costs at 8%
$135,460 ………. Net Gain (Loss)
102.7% ………. Gross Percent Change
94.7% ………. Net Percent Change
4.0% ………… Annual Appreciation
Cost of Home Ownership
$289,900 …….. Asking Price
$10,147 ………… 3.5% Down FHA Financing
3.65% …………. Mortgage Interest Rate
30 ……………… Number of Years
$279,754 …….. Mortgage
$73,351 ………. Income Requirement
$1,280 ………… Monthly Mortgage Payment
$251 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$72 ………… Homeowners Insurance at 0.3%
$291 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$1,895 ………. Monthly Cash Outlays
($193) ………. Tax Savings
($429) ………. Equity Hidden in Payment
$12 ………….. Lost Income to Down Payment
$92 ………….. Maintenance and Replacement Reserves
$1,378 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,399 ………… Furnishing and Move In at 1% + $1,500
$4,399 ………… Closing Costs at 1% + $1,500
$2,798 ………… Interest Points
$10,147 ………… Down Payment
$21,742 ………. Total Cash Costs
$21,100 ………. Emergency Cash Reserves
$42,842 ………. Total Savings Needed
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