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.
Sean- You are absolutely correct. I’ve tracked REOs for the past 2 years. Yes, more foreclosures will happen but no there is no ‘big wave’ of inventory hitting CA soon. Although, a lot of people are selling training based on the Big Wave expectation, Sad! Thanks for the Truth!
Great work as always Sean.
Some are defining “shadow inventory” not just as homes already owned by banks but not for sale, but also as homes that should have been foreclosed on but haven’t been.
Others would add most modified loans (as most end up in foreclosure anyway), option-arm loans about to recast, and even stubbed-out lots ready for new homes as “shadow inventory.”
I completely agree with you that there won’t be a tidal wave of foreclosures coming to market. The Government has already gone “all-in” to prevent it.
Sean,
Although your blog is geared more towards the residential issues we are facing I can assure you the Commercial Real Estate market is seeing very similar trends. The idea of a mass avalanche of Foreclosures and REO properties has drawn a significant amount of investors off the “sideline” and back into the acquisition arena, some for the first time in more than a decade. Yet there is minimal inventory to present to qualified investors and the condition of many of the properties listed for sale today are well below the standards of 90% of the buying pool. Closed, vacant, dilapidated buildings with little to no historical revenue information seems to be the order of the day.
How can I, as a Real Estate professional, get involved in affecting policy for these distressed lenders to clean-up (legitimately) their balance sheets?
I do tend to talk more about residential at this point. But that is primarily because there isn’t much going on with commercial foreclosures… yet.
I do agree that it presents a similiar issue. Lots of capital waiting to buy assets at reasonable prices, but no one yet willing to sell. Will be interesting to see if the FDIC plays their traditional role on the commercial side and forces the banks to clean things off their books, or if they continue to extend and pretend as they have with residential.
In terms of getting involved I think the primary thing is to explain to anyone who will listen that extend and pretend will ultimately hurt a lot more than cleaning things up quickly. Imagine the choice of having your leg broken by someone slowly turning a vice for the next few years, or a quick snap. I’ll take the quick snap, thank you.
Sean,
I agree that there is not going to be a mass foreclosure wave in the next year–maybe 2011, but not 2010.
RIght now, I’ve tracked 26 properties within a 1 mile radius that are either in the NOD or NOT stage. I’m interested in these places.
This is an upper middle income neighborhood. Most of the properties are at least 4000 square feet and in the hay day went for between 1.4 and 2M. Most of these properties are now in the 1M-1.4M range. In the last year there have been roughly 24 sales in this area between 1 and 1.8M, a slight majority were either REO or short sales (13/11).
These 26 properties have default amounts minimum over 800K, some as high as 1.7M. A few questions for you.
1) Since these mortgages can’t be backed by Fannie or Freddie or FHA or any government entity are you seeing any difference at how these move through the foreclosure process? Do they qualify for loan mods under HAMP or other government programs? I would think given the large outstanding balances+ the fact that the first mortgages on these properties are likely still in the money that the banks would be moving quicker to foreclose. But doesn’t seem like it.
2) Are these properties making themselves to auctions? I’m still under the impression that these houses still get to the courthouse step but they get postponed. I can come up with a million cash to go buy some of these things but I don’t want to waste my time in getting cashier’s checks and going to the courthouse only to find out that the sale was postponed yet again.
It isn’t clear to me that size makes any difference.. at least when it comes to foreclosures. I think it is likely that all major financial institutions are insolvent were it not for the backing and support of the government. We got a little glimpse of the power government has over these institutions when Paulson threatened Ken Lewis. Also note that these properties are more likely to have worthless HELOCs from the same bank that is servicing the sold off first. As such they are highly motivated not to foreclose in those cases.
You are not alone in your frustration over repeatedly getting checks only to see properties postpone. This is the number one complaint I hear from auction investors right now. More frsutrating is that they tend to sell the first time you don’t go. It’s unfortunately just part of the deal right now.
Hey Sean,
What do say about this posting by Alexis McGee?
“You have found the best source to get great deals on Foreclosure Properties (R.E.O. real estate owned) that are NOT listed with your Realtor. Let me explain why…
Hey Sean,
I asked Alexis McGee about her opinion in regards to your posting and here is her response:
11/10/09
John,
What I don’t understand is that he has the database of REOs on his site, has he run a search and compared the properties on his site vs the banks site? I have on foreclosures.com and its like 1-10… one for sale on the banks site, 9 not on their site and not sold…. so where does he come up with this?? Makes no sense…
Best wishes,
Alexis McGee
President, Author, Investor
I have clients and friends who have been living in their homes for over 9 months to a year rent free. The banks haven’t foreclosed on them nor have they scheduled an auction date. they do not show up anywhere as preforeclosures because nothing has been filed by the banks. My suggestion is stay in your home as long as they are not taking any action to do anything.
If this is not shadow inventory what is it?
I have been following the foreclosure situation since 2003. I was on the side of buying into this crazy market and lost my tail. Now I am going to take advantage of it to make my money back. I am just puttying my website up now.
“If this is not shadow inventory what is it?”
Delinquencies. They aren’t lurking in the shadows as a number of organizations provide detailed reports on them. See: http://www.mortgagebankers.org/ResearchandForecasts/ProductsandSurveys/NationalDelinquencySurvey.htm
Hi Sean,
As far as REO properties that are not listed are concerned, what is considered a “normal” pipeline? 1- 2 months supply?
Banks resell properties in 7 months on average. So figure 30 day escrow, 30 day listing, and that leaves 5 months average for eviction and trashout.
We don’t compare to the bank websites. We have found those to be a worthless source of data. They list properties that have already been resold and they don’t list properties that they actually have on the MLS.
What we have done is compared each foreclosure since September 2006 to public records to see if it has been subsequently resold in a full-value, arms-length, transaction. The simple reality of that research is that there is no “shadow” inventory of bank owned homes as clearly outlined in our recent CA Foreclosure Report: http://www.foreclosuretruth.com/blog/sean/september-ca-foreclosure-report-more-shadow-inventory. In fact we actually have less then expected inventory of bank owned homes.
Keep in mind we have done this research on a record by record basis for all 500k+ foreclosures. It certainly is subject to some degree of error, but there is zero chance that only 1 out of 10 foreclosed properties have been resold. There is zero data to support that.
One thing that she may not understand is that it does take some time from the date the property is foreclosed on, until it is listed. Evictions are getting lengthier right now, especially with recent legislation that protects renters from eviction for the remainder of their lease. It also takes a little time to clean trash out, and list the property as well. Properties in this process aren’t being “withheld” by banks in the “shadows”. As we point out it takes banks on average 7 months to resell these properties, and they have less than 5 months of inventory on hand. There is no excess, hidden, inventory of bank owned homes in CA, whatsoever.
As a real estate agent who lists REOs for sale, I can absolutely confirm that bank’s websites are not always proactively maintained so as to present current, accurate inventory. I still routinely get calls on an REO property in Tustin that I closed escrow on nearly a year ago (January 2009), because it is still on the bank’s website. I have reported this to them, but apparently it’s still on there.
Analyzing what’s on the MLS vs. what’s on bank’s websites is a relatively useless exercise in determining whether there is “shadow inventory,” in my opinion. I think the method used by Foreclosure Radar seems to be the only sound approach — tracking each notice of default all the way through to whatever happens subsequently, on a property-by-property basis.
With the amount of properties that get postponed each and every day on the LA courthouse auctions i don’t see how there could be no shadow inventory in Los Angeles County.
Sky Minor – postponements aren’t in the shadows, we know exactly where they are, and we have some pretty good ideas as to why they are there.
Also note that I was very careful to say that there was no shadow inventory of “bank owned” homes. Those being postponed are not bank owned yet.
The whole concept of shadow inventory came about Q3 of 2008 as we realized how many more properties the banks were taking back each month then they were reselling – and there were tens of thousands that seemed to be just plain missing. I think there was no question at that time that banks were holding stuff back. But as is typical with these things, the herd didn’t catch on and make this term popular until well after that, and September of 2008 there was a fundamental shift, banks dramatically slowed foreclosures, while at the same REO resales skyrocketed. Since then bank owned inventories have been shrinking, and they are now a non-issue.
What do you call the homes that are and have been sitting empty for months. Most of them originally had for sale signs on them. Others just had the sign that they had been foreclosed on. No tenants in any of them…during the “For Sale” and now while they are just sitting vacant. Public records just show the original owner or the lender. What do you call these situations? There are many of these (mostly upscale) homes in my area of Southern California. What is going on with these homes?
I agree with this reply here. There are so many houses sitting empty, no sign nothing but the original lender and owner on the public records. What are these and how do we work with them??
To Sky Minor- The amount of shadow inventory in los angeles is growing, you are absolutely correct. As was stated by David Santucci, many of the “shadow properties” are not yet REOs, so they are in a grey area and we don’t know how to classify them. But, as the Los Angeles market appears to recover, we will be hindered by the deluge of shadow inventory.
Carmen & Cesar – did you even read my post?
Carmen – there are certainly homes that are sitting, we aren’t claiming there are none. Just that the inventory of bank owned homes is insignificant in the bigger picture, and clearly insufficient to support the idea banks are holding REO inventory off the market. Period. No question about it. We’ve looked at it record by record and the facts are clear. Move on.
Cesar – we totally agree that there are a lot of properties in the foreclosure pipeline. In fact you can look up each and every one of them in ForeclosureRadar.com. Ridiculous to say those are in the “shadows”. We know they are there, and we have a pretty good idea why they are there as I explained above.
Poor Sean:
Seems like you need to get an “auto-commentor” going since you have to repeat yourself over and over….
Some folks just aren’t listening – I just said that! Sheesh….
You can repeat yourself over and over but I see no logic to what you are selling. There are still too many vacant homes with no signs, no listings, and no one living in them. This is not new, it has been going on for at least the last 6-9 months. Call it what you like, but all is not well in this land. I am listening, but I am also seeing and your explanation does not sufficiently convince me to “move on.”
I’m not selling anything, simply reporting the FACT that banks hold relatively little REO inventory, and essentially none that is hidden in the “shadows”.
Perhaps there are a few in your area, or perhaps the vacant homes you see aren’t bank owned. Regardless, there simply is not enough REO inventory to matter in the bigger picture.
And if you’ve read much here you know I don’t think the FACT that there is little REO inventory means we are out of the woods. We clearly still have far too many households that are upside down in their mortgage, non-paying, or in foreclosure to be even close to a healthy housing market. But let’s focus our attention on these very real problems, rather than continuing to talk about shadows that simply don’t exist.
I really would like to understand the causes for the huge delays of FCLR’s and PFCLR’s proceeding to the terminal state and likely loss.
I truly believe we are seeing the delay because the FDIC doesn’t have sufficient funds to cover depositor losses should a major bank fail… and lets be clear some major banks would fail just from having to mark their underwater HELOC portfolios to market (or have them wiped out by foreclosing firsts). So we extend and pretend, and give the banks free money, so they can make big profits and begin to restore their balance sheets. In the mean time they trickle out foreclosures as otherwise everyone would just stop paying once they realized they can stay in their home for free. This approach may work, but it will take years.
I fail to see your logic. Do you need to repeat yourself over an over because you do not believe your own statements?
Can’t you just refer to answer for the name and drop iit there.
I am a writer/author I would not waste my time repeating myself over and over again just to make a point.
The statistics we can see do not reveal what is really happening.
there are may banks which have styled themselves as business banks that did not get into the residential market at all who are about to go under with all the commercial paper they are holding. Here is another shadow inventory. Many investors who hold those properties have residential loans that are going under too. I do not buy your statements. Just like the prognosticators who were saying employment went down in December only to find that when the stats came out it went up.
Statistics do not tell the truth unless the people report them have all the facts. I feel you are reporting what people want to hear rather than what is true.
Obviously I’m not reporting what you want to hear as you seem stuck on clinging to the failed idea that there is something hidden in the shadows.
So let me repeat myself again (its good for keyword density after all):
1. There is no “shadow inventory” of bank owned homes. This is simple fact – we are prepared to review the roughly 500k CA foreclosures to date one-by-one to prove it.
And data is available on negative equity and delinquencies too.
2. There are still huge problems with negative equity, delinquencies, and postponing foreclosures… but they aren’t in the shadows. You can look up the foreclosures right here at ForeclosureRadar.com.
As for what is really happening despite those stats you can read my take here: http://www.foreclosuretruth.com/blog/sean/the-swell-is-huge-no-waves-in-sight/
Sean, I purchase homes at the auction. Must say, you have done a great job with foreclosureradar, it is a great resource.
One thing that is just amazing us right now is that we are seeing dozens of VACANT homes being postponed everyday. Some are shortsales but many are not, these are abandoned properties…
Also another trend we are seeing is tied to Recontrust mainly. They are canceling many after being postponed. Canceling VACANT houses. Now they are going to have to start back at NOD…. This is just ridiculous. Also, from what I understand there is a 3 postponement rule, where the bene can only postpone 3 times without reason, then he must restart from NOD. Is this what is happening? Why Recontrust? which is a B of A subsidiary? What do you think about all this?
Postponements are definitely frustrating right now. You point kind of gets to the core of the issue — banks are saying they are postponing due to loan mods, etc, but reality clearly seems to suggest otherwise if you pay attention. We know vacant homes aren’t postponing due to loan mods. We also know there are a lot more properties that are seriously delinquent or in foreclosure than HAMP reports for active mods. The argument that they don’t have capacity doesn’t wash either – they were foreclosing on twice as many at the peak in 2008, and they’ve had plenty of time to grow capacity. For my take on what is behind it see: http://www.foreclosuretruth.com/blog/sean/the-swell-is-huge-no-waves-in-sight/
And yes, lenders can only postpone due to “beneficiaries request” 3 times under CA statutes — but pretty easy for them to say they are postponing due to “mutual agreement”, doubtful any homeowner would argue it.
OK there is not any shadow inventory of REO’s
What about the houses that he banks have not put into Forecloure where they are not even posting them so you do not have them on Foreclosureradar. This is what I call shadow inventory the banks do not want to list them on their
balance sheets so they go undetected from anybody. The people are still livinig in the house even though they have not made a payment in over a year. What do you call them.?
We have done short sales on them but we have to do searching to find them
Hey Sean, I posted something a few weeks ago regarding Recontrust and cancellations. I was talking with a couple business associates and it seems like we are friends of friends. I use your software daily and am a very active investor. I have a couple questions I would love to ask if you had just a minute or two of free time. I would prefer to not post any names or anything like that on here, but if you would send me an email I could send you my contact information or you could send me yours. It would be much appreciated, I think our mutual interests could lead to a great conversation. Thanks!