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.
Are you suspect that these official numbers are not being reported? What are they hiding?
… 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%
So how many loans is 5.5% of the Orange County total?
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.
Price Declines Inevitable for Many States Due to Backlog: Agency
Esther Cho — DS News — 7/11/2012
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
Proprietary OC Housing News home purchase analysis 
6651 BURNHAM Ave Buena Park, CA 90621
$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
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # Y1203633 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$314,900 6702 ROSTRATA Ave |
0.07 miles 2 bd / 1 ba 1,088 Sq. Ft. |
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$265,000 7412 8TH St |
0.2 miles 2 bd / 1 ba 1,239 Sq. Ft. |
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$350,000 7821 ARTESIA Blvd |
0.8 miles 2 bd / 1 ba 1,066 Sq. Ft. |
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$319,990 6861 NAOMI Ave |
0.93 miles 3 bd / 1 ba 1,067 Sq. Ft. |
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$310,000 6700 HOUSTON St |
1.02 miles 3 bd / 1 ba 1,115 Sq. Ft. |
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$409,900 6740 BERRY Ave |
1.08 miles 3 bd / 1.75 ba 1,233 Sq. Ft. |
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$379,000 7933 DELPHINIUM Cir |
1.12 miles 4 bd / 1.5 ba 1,414 Sq. Ft. |
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$314,500 7632 TULARE St |
1.17 miles 3 bd / 2 ba 1,181 Sq. Ft. |
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$210,000 1439 North WILDWOOD Ln |
1.39 miles 3 bd / 1.5 ba 1,160 Sq. Ft. |
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$365,000 3951 FRANKLIN Ave |
1.4 miles 3 bd / 2 ba 1,246 Sq. Ft. |
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23 Responses to “OC Shadow inventory: What it really is and how large it really is”
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Simon Mikailovich, explains in laymens terms (paging MellowRuse)– the death of price signals, libor, misallocation of resources/capital, mis-pricing, market-rigging, risk, daisy chains and much, much more….
A ‘must listen’, not only for prospective home buyers, but for everyone.
begins at 2min in.
http://www.youtube.com/watch?feature=player_embedded&v=LNIayoaqBu8#!
RT is good. Simon is sharp.
LIBOR scandal is picking up steam. Will it go from the financial pages to the front pages this week?
Tim Geithner “Aided and Abetted” LIBOR Crimes: Jim Rickards
The economy is the main event but the LIBOR scandal will be on the under-card when Fed Chairman Ben Bernanke testifies before Congress today and tomorrow. (See: Bernanke Ready to “Throw in the Towel on Inflation”: Jim Rickards)
At issue is what the Fed, and other bank regulators, knew about manipulation of the key lending rate and whether they condoned banks giving low-ball estimates of LIBOR in order to make themselves look healthier during the crisis of 2008.
Bernanke is likely to face some inquires about this issue, but the U.S. regulator most questions are being asked about is Treasury Secretary Tim Geithner, who is set to testify about the matter before the House Financial Services committee next week.
In 2008, while President of the NY Fed, Geithner sent a memo to British regulators to raise concerns about potential manipulation of LIBOR, as has been widely reported and confirmed Friday by the NY Fed.
The question now is why Geithner didn’t do more to follow up on that memo, considering the central role LIBOR plays in the financial markets. Literally hundreds of trillions of dollars of financial instruments — including complex derivatives but also basic consumer loans are tied to LIBOR, technically the London Interbank Offered Rate.
The LIBOR scandal is “so big I don’t think people have got their minds around it,” says Jim Rickards, a partner at JAC Capital Advisors and author of Currency Wars: The Making of the Next Global. “This is the largest financial scandal I’ve seen in my career.”
If $500 trillion of swaps are based on LIBOR and the rate was manipulated by 10 basis points over five years, that’s $2.5 trillion of fraudulent transactions — more than the combined capital of the nation’s five largest banks, Rickards explains. “Congress may have to step in to limit the damages because it would threaten the banking system.”
Led by the City of Baltimore, several U.S. municipalities have already filed lawsuits, seeking damages for interest rate swaps that were pegged to LIBOR, The NY Times reports. Analysts at Nomura Equity Research warn banks could be liable for “tens of billions” in related claims, while Morgan Stanley estimates the tab could be $22 billion.
Meanwhile, Rickards boldly claims Geithner could face “criminal liability” for failing to refer LIBOR manipulation to the Justice Department or FBI. “A fraud is a crime,” he continues. “You can’t witness a crime and not call the cops. Geithner might be guilty of aiding and abetting a crime.”
Pressed on this, Rickards concedes it’s highly unlikely Geithner will be charged with anything — “the Justice Department will finesse it,” he says. But that won’t stop members of Congress from trying to score political points and put Geithner (and Bernanke) in the hot seat in the days and weeks ahead.
Since lenders control short sales due to their required approval, lenders can restrict that supply as well to make prices go up and make future buyers pay more.
How Negative Equity Improves Home Values: Reports
Home prices are increasing, but one of the main drivers behind the boost in home values is also weighing on supply and demand.
According to a report from CoreLogic, negative equity is helping to drive up home prices because it also keeps homeowners from listing their property, which keeps inventory low.
Of the largest 100 markets, the five markets where prices are accelerating the fastest also have the highest share of negative equity and high demand for distressed properties.
Examples CoreLogic provided were Phoenix and Miami, where prices in May over a 12-month period appreciated by 14.7 percent and 9.7 percent, respectively.
In a recent report, Capital Economics also addressed the impact of negative equity on home values, and said that in a handful of hard-hit states, homeowner vacancy rates are well below the average, an indication of low supply.
“Presumably that’s because investment demand for cheaper homes – which are more likely to be afflicted by negative equity, and therefore in relatively short supply – is particularly
strong in States where housing valuations are especially low,” wrote Paul Diggle, property economist for Capital Economics.
CoreLogic also noted that homes in the lower-price segment are appreciating more rapidly. Over a one-year period, homes priced 125 percent or more above the national median improved by 1.8 percent compared to a 5.7 percent increase for homes priced below 75 percent of the national median.
This improvement in lower-priced homes, CoreLogic explained, is also helping to reduce the share of negative equity since underwater homes tend to be concentrated in lower-priced segments. Thus, as lower-priced underwater homes start to show price gains, they move out of negative equity. CoreLogic’s most recent report on negative equity revealed that 700,000 homes found their way out of being underwater in the first quarter of this year due to price improvements.
While negative equity does harm the housing market, Diggle said the net effect of negative equity on the homes prices is “fairly muted.”
“The bottom line is that negative equity will continue to weigh heavily on housing market activity, both on the supply side and the demand side. Nevertheless, it isn’t preventing a modest housing market recovery from taking shape,” Capital Economics concluded.
I wonder why CoreLogic doesn’t mention Oakland, where June 2012 median price of SFRs was up THIRTY NINE PERCENT over June 2011 (per Redfin). I’ve been watching the market up to about 450-500k very closely the past year, and haven’t seen very many short sales – and even fewer REOs.
Of the approximately 913 REO SFRs in Oakland now (per realtytrac), only about 45 of them – five percent – are for sale.
Keeping inventory off the market is pushing prices up all over. In areas with high incomes and job growth, the price push is the strongest. Phoenix is doing very well. Of course, everyone wonders what will happen when or if the banks ever release these properties. So far, they’ve managed to keep them off the market for five years now.
Couple this with falling interest rates and yes, prices can rise temporarily. This is clearly unsustainable, blowing air back into the housing bubble. I fear the unintended consequence of this foolish action.
I get free food from the fed to feed myself. I hoard any I don’t eat. If you want any you must serve me. I want your soul and your first born.
And I believe the Homeowners bill of rights will drag out this process even longer.
“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 foreclosuresAt that rate, it will take them 24 years to process those who are currently delinquent on their mortgages.”
That’s just a joke, I thought with the REO to Rental program banks would have increased the foreclosure processing. It seems like it’s going even slower.
HELOCs are the new amortizing loan recast problem.
Here Comes the Catch in Home Equity Loans
IS the housing market finally coming back from the dead?
Recent data suggests as much. New homes are being built again. Sales of existing ones are rising — up nearly 10 percent in May from the same month of 2011. Also in May, pending home sales, a figure based on signed purchase contracts, matched their highest levels in two years. Gains were seen across the nation.
After so many years of declines, these signs of life in housing are surely welcome. But the fact is, even a strong recovery is unlikely to rescue many homeowners who are groaning under the weight of multiple mortgages.
That’s because of the nature of home equity lines of credit, which require low payments in the early years followed by hefty payments later on. For many borrowers, those later years are fast approaching.
During the initial years of home equity credit lines, borrowers must pay only interest. Borrowers can also pay down principal if they wish, but many homeowners, short on cash, haven’t done so. At Wells Fargo, for example, in the quarter ended March 31, some 44 percent of the bank’s home equity borrowers paid only the minimum amount due.
Being required to pay only the interest on these loans has made them easier for troubled borrowers to carry. But these easy terms are about to get tougher. What’s known as the initial draw period for home equity lines of credit is coming to an end for many borrowers. Soon, they will have to pay principal as well.
Ten days ago, the Office of the Comptroller of the Currency published some frightening figures about the looming payments. In its spring 2012 “Semiannual Risk Perspective,” it said that almost 60 percent of all home equity line balances would start requiring payments of both principal and interest between 2014 and 2017.
The amounts owed in these lines of credit climb significantly in coming years. While $11 billion in home equity lines are starting to require principal and interest payments this year, the amount jumps to $29 billion by 2014, the office said. That is followed by a surge to $53 billion in 2015 and $73 billion in 2017. For 2018 and beyond, it’s $111 billion.
“Home equity borrowers face three potential issues,” the report concluded. They include risk from rising interest rates — most of these loans have adjustable rates — and payment shock as borrowers realize they have to pay down principal. Refinancing difficulties are also a problem, it said, “because collateral values have declined significantly since these loans were originated.”
That’s for sure.
Don’t look now but prices are starting to come back down in Vegas
IR,
You repeated the 8 Star Thistle, Irvine, CA 92604 listing above (which was in your 7/16 post) instead of 6651 BURNHAM Ave Buena Park, CA 90621 in today’s.
Thanks, I fixed it.
“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.”
IR – Your assumptions about the New York law are incorrect. If a borrower has been served notice, and hence that loan has been reported to the state, it means the NOD has also been filed, or will be within 30-45 days. That’s why the law is jokingly referred to as “The Notice of Notice of Default Law”.
It seems that we can figure by now that the banks have no motivation to foreclose and therfore, won’t. There will not be any wave of foreclosures. With “mark to whatever” as GAAP, it is profitable to pretend and extend. Why book losses if you don’t have to? Why does anybody continue to assume that at some point the banks will be fidn it necessary to foreclose or to sell their REO?
If they foreclose they admit they are bankrupt and/or they sold worthless securities. That means they’re out of a job or/and might get arrested. The incentive to ignore the problem is definitely there.
When your bonus are tie to the stated profit, why would they ever declare a loss when they can declare a profit? The losses will be transferred to the taxpayers and remaining loss will be taken as a one time loss, that is not counted against the exec’s bonus structure. Of they play it right, they can get a retention bonus for not leaving after the loss. Sweet deal for them, sour deal for the shareholders.
So if there are significant number of people delinquent on mortgage payments but without foreclosure notices, who’s paying the local property taxes? Are these same delinquent mortgagees keeping up with the local property taxes? Seems like some of this shadow inventory should show up as property tax liens unless they’re only stiffing the banks.
Surprisingly enough, borrowers generally remain current on taxes, credit cards, even second mortgages, when they are delinquent on their first mortgage.
when your housing expenses are practically nill I imagine that taxes are awfully affordable
The banks advance property taxes to protect their lien position, when necessary. The loan doesn’t have to be in foreclosure either.
But don’t banks in California have about 5 years to pay taxes before there is a tax sale. The reason you see so few in California. Granted it’s at a 18% penalty per year. I just don’t see the see the reason but money into a sinking asset.
Why would the loan owner pay the property tax while not paying the first and with no equity. Doesn’t the RE tax go with the property? Does the bank or purchaser need to pay the property tax ? Thus, the old loan owner can pocket a few years of free rent and save to pay real rent after the FC.
MR is likely correct. Those that are paying the RE tax while under pre- or in FC aren’t fully gaming the system.