The Problem Of “Shadow Inventory”


American Banker has posted an article, written by Kate Berry, about two possible outcomes of the current mortgage crisis. Several hundred homes thousand homes have been repossessed and are n the process of foreclosure, and several million homes that have already been foreclosed. Such staggering numbers bring up a difficult question: “How long can lenders put off dumping these properties?”

There are two ideas of what will happen:

One group says a breaking point will come in the second or third quarter: The supply of these distressed homes will get so big that banks and mortgage servicers will have no choice but to begin moving more borrowers into foreclosure and working through their stockpiles of seized collateral…First American CoreLogic, an analytics unit of the Santa Ana, Calif., title insurer First American Corp., has estimated that 1.7 million homes make up the shadow inventory – properties that have been repossessed, are in foreclosure, or are seriously delinquent. This supply is not included in the official measure of inventory – amounting itself to 3.75 million homes – listed in Multiple Listing Services across the country.

Banks are in the difficult situation of trying to figure out what to do when the shadow inventory hits the market to prevent real estate prices from plummeting. Many think the situation will last longer because of programs like Obama’s Home Affordable Modification Program.

“The time line for a recovery has been stretched out, because some of these government programs can’t cleanly separate out the borrowers who can be saved from those who can’t,” she said. “Five years from now seems to be the time line for a lot of these servicers.”

Servicers have approved 46,056 mortgage modifications under HAMP. Roughly 25% of the 787,231 borrowers in the program are expected to not make payments and drop out.

To speed the resale of foreclosed properties, the Department of Housing and Urban Development said Friday that it will temporarily waive a rule that restricts homebuyers from obtaining Federal Housing Administration-insured mortgages when the seller has owned the house for fewer than 90 days.

Pendley said she expects 65% to 70% of the small group of borrowers who received permanent mods to redefault within a year, largely because so many of these borrowers have large nonmortgage debts and they stretched to buy homes they could not afford.

Many experts say banks are expecting the government to come up with more money to fix the problems by tweaking the program to address borrowers who are unemployed and those who have negative equity.

If you would like more information about foreclosure, check out our articles Wrongful Foreclosures in Alabama and The Three Stages of Foreclosure in Alabama.

Feel free to contact us through our website or by calling 205-879-2447 if you have further questions or concerns.


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