I’ve talked in the past about some of the approaches to rescuing the housing market and providing economic stimulus, such as the Treasury Department lowering mortgage interest rates, the California Foreclosure Prevention Act, the Countrywide settlement, and the Housing and Economic Recovery Act of 2008.

Despite all of these measures we remain in housing limbo, with millions of homeowners underwater on their mortgages and unable, or unwilling to make their payments; yet with few being foreclosed, as lenders and the government desperately search for alternatives.  The reality is that we will likely remain in limbo until we as a society develop the political will to either move ahead on foreclosures, or bail out homeowners.

However, one effect of this housing limbo is the free rent we’re effectively giving to those homeowners, and the contribution this free rent provides to the local economy.

When homeowners quit paying $1500 per month on their mortgage, that cash is available for other parts of the family budget. I’ve purchased 150+ foreclosures, and I can’t remember a single homeowner that wasn’t broke when it came time to move. Rather than saving, they’re going out to dinner, subscribing to sports packages on TV, and buying iPhones or netbooks. Many of those purchases would have to be delayed, or foregone altogether, if they were still paying their mortgage.

By allowing banks to stall on foreclosures and keep non-paying assets on their books, we’ve enabled a redirection of resources that provides a short-term boost to the local economy, a stealth stimulus package. Whereas paying that money to the lender through mortgage payments would probably take it out of state, and maybe even overseas to China; shopping locally with that same money keeps it working in the local economy, and benefiting local businesses.

In addition, local governments are benefiting from increased sales tax revenues. Some may say that this gain is offset by the loss of property taxes, since people who don’t pay their mortgage also quit paying their property taxes. But property taxes will eventually be paid, with accrued interest on the next title transfer. Thus there is no loss of property tax revenue but rather a simple delay in payment.

With rising unemployment, this (perhaps unintended) stealth stimulus couldn’t come at a better time for local economies. When I go out to dinner I look around and wonder—how many folks around me are out tonight thanks to a delayed foreclosure, and no mortgage payments.

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There is currently no shadow inventory of bank-owned (REO) properties. What’s more, a surge in REO properties is not likely anytime soon.

If this sounds familiar, it’s because I’ve said it before, here and here and other places. However, it still seems to be news (see the recent WSJ article) and despite the fact that the most recent CA Foreclosure Report from ForeclosureRadar.com runs the numbers, some still insist the shadow is there.

First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.

Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.

Not so. These properties are not lurking in the shadows at all. We know exactly which properties are in trouble and where they are in the process. Using ForeclosureRadar.com you can easily see every potential REO listing, from Notice of Default to Notice of Trustee Sale, for the next six to nine months. In addition, even if banks reversed course and started foreclosing aggressively today, it would be months before we saw those listings as it takes time to evict the homeowner, clean up and list the property.

What’s more, they’re not going anywhere. These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.

As a result, the pendulum has swung to the other side. Instead of a glut of properties hitting the market, as so many have warned, we currently don’t have enough inventory for those who want to buy homes, and homeowners are still in trouble because the so-called solutions (foreclosure moratoriums, loan modification, refinancing) don’t fix the real problem, which is negative equity.

No more conspiracy theories. We need to abandon the obsession with shadow inventory, which distracts us from the national discussion we should be having. With the current lack of inventory, its time to force banks to clean up their balance sheets by dealing head-on with the trillions in negative equity that remains, either though loan modifications that reduce principal balances to near current value, short sale, or, if necessary foreclosure. These are the only solutions that deal with the core problem of negative equity. It’s time for “extend and pretend” to end.

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This month’s report features not only a new look, but an important new statistic – Bank Owned (REO) Inventory. By looking at the number of foreclosures the banks have taken back and subtracting those that have since resold, we are able to show the number of foreclosures the banks have held as inventory over time.

Click here to download the September CA Foreclosure Report.

Check out our new video version:

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I mentioned previously (http://www.foreclosuretruth.com/blog/sean/are-foreclosure-sales-simply-hampered) that as a society we don’t have the political will to foreclose on every mortgage in default. As a result, we see government interventions including foreclosure moratoriums, troubled asset relief, and new loan modification programs. However, these are at best stop gap measures — each failing to adequately reduce principal balances to address the core problem of negative equity.

It’s time to stop waiting for a government bailout or for the bank to come take the house. Homeowners in default don’t have to choose between the lesser evil of foreclosure or a government solution that leaves them a prisoner of debt. There is another way — a short sale.

A short sale is a sale of a home for less than the amount owed on the loan or loans. There are many reasons why a homeowner who receives a notice of default should take charge and aggressively pursue a short sale. First is the impact to the credit report. Dealing with debt via bankruptcy affects a credit report for 10 years vs. a worst case of seven years with a short sale. When it comes to buying another home, foreclosure prevents the owner from getting a Fannie Mae loan for five years as compared to two years for a short sale. Then there is the opportunity to negotiate a full release from all lenders, allowing the homeowner to settle with no concern of future collection efforts. And proactively negotiating a short sale doesn’t bear the stigma of foreclosure or walking away from a debt.

However, navigating a short sale is not for the faint of heart or the inexperienced. Lenders differ greatly in how they respond to offers. Some lenders, such as Wachovia, are aggressively processing short sales, while others, such as Bank of America, are more cumbersome. (You can get detailed information about specific lenders at http://www.foreclosureradar.com/short-sale-report)

In addition, the regulations can be confusing, even to some industry professionals. In August 2009 in California, Senate Bill 306 was approved, which made changes to the California Civil Code related to real property transactions. (See http://www.leginfo.ca.gov/pub/09-10/bill/sen/sb_0301-0350/sb_306_bill_20090806_chaptered.pdf for the full text of SB 306.)

Some analysts have said they expect that SB 306 will dramatically speed the short sale process. In reality, SB 306 doesn’t address the overall short-sale timeline, just steps in the process after the agreement is executed. Specifically, a lender now must respond in writing to a request for a short-pay demand statement in 21 days. Since lenders already have a similar requirement for requests for a payoff demand for loans not in default, this will not likely improve short sale timelines dramatically.

When it comes to distressed properties, a REALTOR® is in the best position to partner with a homeowner to secure an offer on the home and negotiate a short sale with the lender. Proactive REALTOR®s use tools like ForeclosureRadar.com to locate homeowners best suited for short sales, to track the process and to monitor the status of the property during the short sale. Tracking and monitoring is important to insure that the property isn’t foreclosed on before the sale is successfully completed, a matter of interest not only to the sellers, but also to the buyers.

Finding an agent that is a good fit is more challenging when facing foreclosure. A few key questions will help verify that the agent has the knowledge, experience and infrastructure to handle a short sale scenario, such as:

• How many short sales have you handled in the last year? How many were successfully closed?
• Have you worked with my lender before?
• Do you work with the lender directly or with a short sale processing company?
• Can I get three references of homeowners for whom you have executed a short sale?

Homeowners should also seek advice from a qualified accountant and real estate attorney.

Foreclosure is not necessarily inevitable. A homeowner who receives a notice of default should contact a REALTOR® to investigate the possibility of a short sale. It can offer the quickest and cleanest path to financial recovery.

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In my last post Waiting to catch a wave? Surge of REO’s unlikely, I speculated that foreclosures had dropped primarily because of U.S. Treasury Secretary Henry Paulson’s announcment to seek troubled asset relief for banks. The result being that banks are incentivized not to foreclose thanks to mark-to-model accounting changes, and an implied promise that the Fed or taxpayers will take bad loans off their hands at a premium if necessary.

This topic, and shadow inventory, which I also recently posted about, have been hot topics in the blogosphere and in the news. Many have predicted a wave of foreclosures is coming, while others are predicting that foreclosures are being held off the market to manipulate home prices. If you read my recent posts you know I have a different take. A few days ago, Diana Olick of CNBC did what I hoped someone would do and put the question directly to Bank of America. They essentially said that foreclosures had been delayed by the Making Home Affordable program, and would likely increase soon.

Despite it being hard to take banks at their word right now, I do think it is likely that the Making Home Affordable program, and specifically the Home Affordable Modification Program (HAMP) component of that program are playing a significant role in the delay of foreclosure sales. We actually pointed to some evidence of it in our July California Foreclosure Report, where we noted that many scheduled foreclosure sales were being postponed due to lender requests — likely because of this program.

So is it possible that foreclosure sales have simply been “HAMPered”? While I certainly think HAMP has played a role in delaying foreclosures, I don’t believe it is the full story. HAMP was not announced until February 2009 and details were not out until March yet we saw foreclosure sales drop dramatically just days after the Paul announcement last September. A commenter on my blog suggested the foreclosure drop in September was due to Fannie and Freddie being put into conservatorship and implementing moratoriums, rather than the Paulson announcment. That too is a great point. But we saw across the board drops in foreclosures, including for loans that clearly weren’t owned or guaranteed by Fannie or Freddie, so it too is an insufficient answer in and of itself.

The reality is that there are a lot of moving parts, and while its hard to do more than speculate about the specifics, the bigger picture remains clear. As a society we don’t have the political will to foreclose on everyone who isn’t paying their mortgage, and whether by implementing foreclosure moratoriums at Fannie and Freddie, announcing troubled asset relief, or pushing new loan modification programs we will continue to see the government intervene to keep foreclosures down.

Near term I believe this will help put a floor under housing prices and provide some sense of stability. Longer term I believe the government interventions to date fail to adequately deal with the negative equity problem and that they have simply kicked the can down the road leaving us with foreclosure problems for years to come.

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For a number months now I’ve been telling reporters and others that I didn’t think we would see the big wave of foreclosure sales, and subsequent REO listing that some have been predicting. Until recently that was mostly based on a gut level feeling that banks (servicers) simply didn’t have the will to complete more foreclosures given the anti-foreclosure backlash. With a little hindsight, things have become clearer.

First, to be fair to those who have been predicting the wave, the numbers would suggest that California foreclosure sales should be surging right now. After a brief respite due to CA Senate Bill 1137, Notice of Default filings surged last December, and have remained at near records levels since, and even hit a significant new record in March at 52,163 filings. Similiarly, Notices of Trustee Sale have also surged, setting a new record as recently as May. Thus, it would be logical in normal times to conclude that foreclosure sales, and subsequently REO listings, should now be surging too.

But these aren’t normal times. While foreclosure sales have increased since the moratoriums began to lift, they remain well below the peak levels reached July 2008, and as you’ll see in our next CA Foreclosure Report, will actually fall from June to July this year.

So what happened? In my opinion the answer is found in the troubled asset relief announcment made on September 19th by U.S. Treasury Secretary Henry Paulson. Clearly Paulson believed at that time that banks (servicers) would fail unless they were releived of the mounting losses on mortgage backed securities and other troubled assets.

In fact the Fed began purchasing direct obligations of Fannie, Freddie and the Federal Home Loan Banks on September 24, and later began purchasing mortgage backed securities. Click here for details on purchases to date from the Federal Reserve Bank. The total has reached nearly $650 Billion. Keep in mind that the total loan value on ALL foreclosed loans in California since this crisis began is under $200 Billion.

While many will point out this was necessary to keep home loans available and interest rates low, I think it also clearly sent banks a message… you will get more for these assets from the taxpayer than you will through foreclosure. Add to that the mark-to-model rule changes from the Federal Accounting Standards Board, and a ton of politicial pressure and it should be no surprise to anyone that foreclosures have slowed.

Still unsure? Consider the following chart. The grey line is the total number of properties scheduled for foreclosure sale (using scale on right). The blue and green lines are daily foreclosure sales for California, divided into two parts – before and after Paulson’s announcment.

The drop in foreclosure sales defies logic given the continued increase in properties scheduled to be foreclosed on. But defying logic to do what is politically expedient while simultaneously inflating bank earnings and bonuses and without regard to future consequences IS the new normal. We are yet again trading tomorrow for today.

For those of you still waiting for a surge of foreclosure sales, the truth is you’ll likely be waiting a long time.

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I’m regularly asked about the so-called “shadow inventory” of bank owned homes that are supposed to flood the market at any moment. First, lets be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but has not yet listed. It obivously does not inlcude homes the bank has already sold, nor the ones it has listed for sale.

We know exactly how many homes the banks have taken back. In California they’ve taken back a total of 419,183 from January 2007 through June 2009. We also have an estimate of how many have been sold during that period: 328,645. Subtract the two and you have a total possible shadow inventory of 90,538, but that’s not the whole story. Around 20,000 REO’s have been selling each month and a typical escrow is 30 days, so subtract 20,000 that are currently pending and are likely to close. We also know that some of these are listed, but not yet pending, but unfortunately we have so many MLS’s in CA that it is hard to get the exact number. Let’s shoot low and assume there is only another 20,000 listed. We are now down to a shadow inventory of just 50,538.

But there is something else implied when people talk about shadow inventory… the notion that banks are holding properties back, in the shadows, in an attempt to hide something. To see if that might be true, I think it is only fair to remove those properties that likely will be listed as soon as they are available. Afterall, the banks get these properties back at the foreclosure auction with the current still in the property, requiring eviction. They may also have to make repairs, or haul away trash and debris. This process usually takes somewhere around 120 days. During the last 120 days banks took back 56,086 properties, though certainly some of these will be clean and vacant. But again lets be conservative and only deduct half from the shadow inventory – we now have a total possible shadow inventory of 22,495 REO’s.

At the current rate of REO resales that means that even if banks are purposefully withholding properties, the truth is that it can’t be very many — a months worth at most.

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ForeclosureRadar.com released its June 2009 CA Foreclosure Report today. While foreclosures were generally trending upward, Notices of Trustee Sale unexpectedly dropped, apparently due to the new California Prevention Act that went into effect June 16th. Despite the majority of major lenders in the state receiving an exemption from the act, filings dropped by nearly 50 percent as soon as the act went into effect. Filings were climbing back toward previous levels by the end of June so we still expect the law to have little long term impact.

Resources:

Complete text of California Foreclosure Prevention Act

List of exempt lenders under the CA Foreclosure Prevention Act

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Lots of calls today from folks wanting the scoop on the “new moratorium” here in California. Seems that some have misinterpreted the new law and believe that it may have a big impact.

The new law adds 90 days to the existing 3 months between the filing of a notice of default and a notice of trustee sale, but exempts servicers (lenders) who put in place a loan modification program.

Overall the law makes little sense to me. Why our legislators are pushing lenders so hard to lockvhomeowners in a prison of debt and delay the inevitable is beyond me,
but much like SB1137 last year, they are once again back at it with
another attempt to force loan mods that I believe will again fail to make any real difference.

We expect most lenders have at least applied for an exemption from this law by submitting their loan mod program. As such we expect no immediate change in foreclosure activity. Even if the state gets tough and denies the servicers application for the exemption, those servicers have a chance to resubmit, and the mortatorium still won’t apply to them for 30 days after the denial.

The moratorium also applies only to owner occupied ifrst mortgages made between 2003 and 2007, though that is the majority of foreclosures we see today.

Bottom line – if we see any impact at all it likely won’t be until August or September. But these payment based loan mods are largely better for servicers than homeowners, so I can’t imagine that servicers won’t at least put a program in place. We will of course keep an eye on it.

For the complete details see the bill itself: http://leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx2_7_bill_20090220_chaptered.pdf

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According to the latest report from the Mortgage Bankers Association a stunning 12 percent of homeowners with a mortgage are now at least one payment behind. Given the nationwide estimate that 25 percent of homeowners with a mortgage are now underwater this really shouldn’t come as a huge surprise – but it is a stunning number in historical terms in any case.

What is actually MOST surprising to me is that anyone still thinks we have a “foreclosure problem” at all. Or that lenders are “aggressively foreclosing”. Shoot, let’s be realistic, we have almost no foreclosures in comparison to the number of folks that are not making their payment, and even fewer in comparison to the number of folks that are now seriously upside down in their home and essentially stuck in a prison of debt.

So the next time you see a reporter talking about the “foreclosure problem”, or are at the other end of an ACORN bullhorn, let them know that we actually have an unbelievably low number of foreclosures given how many homeowners are upside down and not making their payments. And then politely suggest they are focused on the wrong problem and have completely missed the bigger picture – $4 Trillion in excess mortgage debt.

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