New Housing Crash Looms as Shadow Inventory Climbs past 7 Million: Analysts
The housing crash is about to come back with a vengeance, as 7 million new foreclosure properties are about to hit the market, analysts at Amherst Securities Group LP said this week.
The New York-based mortgage-bond analysts called that number – which is about five-and-a-half times larger than 2005’s national tally of delinquencies and foreclosures – a huge shadow inventory that threatens to further destabilize a housing market that had shown signs of righting itself over the summer.
Despite some recent optimism, many market observers now agree on several factors that are expanding the nation’s shadow inventory. Loan modifications, legal wrangling, redefaults and bank practices have delayed foreclosures while actually worsening many homeowners’ positions.
As a result, the analysts say a so-far undisclosed glut of homes is about to come to light, and it’s likely to further depress values and sales.
There’s going to be a flood [of bank-owned homes] listed for sale at some point, John Burns, a real-estate consultant based in Irvine, California, told the Wall Street Journal this week. He expects prices to decline another 6 percent this year. The analysts at Amherst predicted an 8 percent drop, while a Sept. 11 report by Barclays forecasted a further 13 percent drop, saying the worst of the crash is decidedly underway, with increased foreclosures sapping “the strength of the recovery in all but the most optimistic of scenarios.”
One cause of the problem, the Journal says, is unintended fallout from well-meaning efforts to keep families in their homes. Foreclosures have been stalled by state moratoriums, as well as by lenders and servicers who are using the time to determine if troubled borrowers are eligible for loan modifications.
We are going to see a spike from now to the end of the year in foreclosures as we take people out of the running for modifications or other alternatives to foreclosing, a Bank of America Corp. spokeswoman told the Journal, adding that government pressure to stem foreclosures had reduced their foreclosure sales to abnormally low levels.
But as many proposed modifications result in higher monthly payments or other terms the borrowers don’t like, more potential foreclosures are getting held up in court, too. That’s what happened to Debra and Arthur Scriven of Columbia, South Carolina, who told the Journal that Citigroup had attempted to foreclose on them 15 months ago. Since then, the lender offered a modification they felt was unfair, and their situation has stalled as they await a date for a hearing in foreclosure court.
But evidence is mounting that even when modifications are successfully written, the likelihood of a borrower defaulting again – and heading for foreclosure again – is alarmingly high. That’s because even a significant reduction in interest or principal can’t save a homeowner who’s underwater or overleveraged. Modifications have made not much of a difference in the shadow inventory, the Amherst analysts’ report said. And many of these borrowers would default later, if they remain in a negative equity position, they added.
Banks, too, are contributing to the shadow inventory problem. Fearful of the added costs of acquiring foreclosure properties and trying to sell them, many banks have simply declined to foreclose on some of their most non-performing borrowers. According to a report by LPS Applied Statistics, banks hadn’t even begun the foreclosure process on 1.2 million properties that are 90 days or more past due. In July, 217,000 mortgages that hadn’t seen a payment in a year still weren’t being foreclosed on – a number that’s more than doubled since last year. Lenders have also scaled back their bidding at the public auctions and trustee sales that usually precede a bank foreclosure. That’s letting outside investors pick up the properties at a deep discount: According to the research firm ForeclosureRadar.com, 19 percent of homes sold in August in California trustee sales went to investors and not lenders – a 500 percent increase in the past year.
What this all means, the Amherst analysts say, is that the shadow inventory will soon eclipse the economy’s recent sunny outlook.
“The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.
DSNews.com By: Adam Weinstein 9/25/09
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