Oct172013

Corelogic’s shadow inventory reporting is misleading

Corelogic is a data company spun off from First American Title a few years ago. Their business is to sell information and analysis; therefore, their credibility is paramount. It’s been argued this makes them nearly infallible. Today, I will argue otherwise.

Corelogic has established themselves as the authority on shadow inventory. They publish a periodic report that is widely covered by the mainstream media. Their methodology is sound, and their data is accurate. However, as with any study the devil is in the details. There is one small detail that makes their reporting on shadow inventory very misleading.

According to DS News, “Properties that are not yet delinquent but may become delinquent in the future are not included in CoreLogic’s estimate of the current shadow inventory.

This is a critical point because the lender can-kicking I have been going on about for the last 18 months is all about managing the reported shadow inventory numbers. When a lender modifies a seriously delinquent loan, that loan is no longer counted in shadow inventory. If the modification were actually a permanent cure and the loan were to perform until the owner sold in a non-distressed sale, then Corelogic’s measure of shadow inventory would be a good measure of the problem. Unfortunately, loan modifications are not a permanent fix. The redefault rates are very high, in excess of 50% on many vintages. These redefaults are ignored by Corelogic as if they don’t matter. They do.

Why shadow inventory is still important

A distressed sale is an additional sale in the marketplace that would not have otherwise occurred. People buy and sell for many personal reasons, but only financial distress compels them to sell when they don’t want to. If there is a great deal of financial distress — like millions of people dealing with toxic mortgages and unemployment — then a great many additional sales are added to the market, and prices generally decline. Shadow inventory is supposed to be a measure of future distressed sales, but it fails  miserably in that regard because it ignores future distressed sales everyone knows will occur when today’s loan modifications finally blow up.

Lenders know these future distressed sales are coming, but they hope that the economy will finally pick up, household formation will rise, and organic demand will finally materialize to absorb these sales. And eventually that will happen. But when it does, those sales will be added to the organic sales in the market, and these distressed sales will be another weight overhanging market prices. Everyone wanting prices to rise rapidly is enjoying the lack of inventory today, but they’ve merely delayed the Day of Reckoning. Eventually, these added sales will come to market.

Only a few of the most ardent housing bears are clinging to the tsunami of REO scenario. Banks are now skilled in metering these properties on to the market at a rate the market can absorb. These future sales won’t pummel prices like the crash of 2007 and 2008, but their presence will serve to keep appreciation in check for quite some time.

Shadow Inventory: The Zombie Meme That Won’t Die

By Nick Timiraos — October 15, 2013, 4:35 PM

Like a zombie that keeps coming back from the dead, news reports continue to suggest there’s a large “shadow” inventory of potential foreclosures threatening to sink the housing market.

There’s just one problem: the data doesn’t show it.

That is exactly what lenders want everyone to believe. I believe Corelogic is complicit in this regard and chose not to include the obvious future delinquencies to intentionally understate the problem. In reality, there is plenty of data showing the redefault rates on various loan vintages. Corelogic could easily incorporate this into their shadow inventory calculations and provide a much more accurate picture of future distressed sales. They chose not to.

For the past three years, a number of housing pundits have issued ominous warnings about the millions of underwater mortgages, modified mortgages, and delinquent mortgages that threatened to drag down the housing market. But efforts to modify and refinance mortgages—together with surprisingly strong demand from investors for distressed properties—have whittled down this shadow supply.

Can-kicking through loan modifications does not solve the problem. It merely delays the impact. The data on redefaults shows this rather clearly.

At the end of July, banks and other mortgage investors held around 309,000 foreclosed homes on their books, down 16% from one year earlier to the lowest level since 2007, according to data tracked by Barclays Capital. The bank-owned foreclosure inventory in July was more than halfway below its late 2008 peak.

The investment firm estimates that another 2.47 million loans were seriously delinquent—either 90 days or more past due or in foreclosure. That’s the lowest level since the end of 2008 and 21% below year-earlier levels.

State foreclosure processing requirements have also stretched out the foreclosure process, meaning that even if more of these loans can’t get modified, they’re unlikely to be dumped on the market at once.

While that is true, it’s a very different argument than saying the problem is going away. The tsunami threat is abated, but the overhanging supply of cloud inventory remains.

The bottom line is that Corelogic’s estimates of shadow inventory do a poor job of forecasting the number of future distressed sales. Those who get comfort from these reports are deluding themselves.

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8921 BISHOP Ave Westminster, CA 92683

$639,900 …….. Asking Price
$169,000 ………. Purchase Price
10/25/1993 ………. Purchase Date

$470,900 ………. Gross Gain (Loss)
($51,192) ………… Commissions and Costs at 8%
============================================
$419,708 ………. Net Gain (Loss)
============================================
278.6% ………. Gross Percent Change
248.3% ………. Net Percent Change
6.9% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$639,900 …….. Asking Price
$127,980 ………… 20% Down Conventional
4.30% …………. Mortgage Interest Rate
30 ……………… Number of Years
$511,920 …….. Mortgage
$124,693 ………. Income Requirement

$2,533 ………… Monthly Mortgage Payment
$555 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$133 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,221 ………. Monthly Cash Outlays

($506) ………. Tax Savings
($699) ………. Principal Amortization
$199 ………….. Opportunity Cost of Down Payment
$180 ………….. Maintenance and Replacement Reserves
============================================
$2,396 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$7,899 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,899 ………… Closing Costs at 1% + $1,500
$5,119 ………… Interest Points at 1%
$127,980 ………… Down Payment
============================================
$148,897 ………. Total Cash Costs
$36,700 ………. Emergency Cash Reserves
============================================
$185,597 ………. Total Savings Needed
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