Monitor Foreclosure Speed Not Just Volume

The second installment examines various procedures and legislation impacting the process, along with geographic market factors that can have an effect.

Shadow Inventory: Monitor Banks’ Speed, Not Just Volume

What’s more worrisome than the actual “shadow inventory” is how banks dispose of it—and whether there are enough buyers willing to purchase the homes when they do.

It’s increasingly clear that banks—whether by design or not—aren’t going to foreclose quickly and relist all of these homes for sale. While there were 3.25 million loans that were in the foreclosure process or in default at the end of May, banks owned around 407,000 homes at the end of May, according to estimates from Barclays Capital.

The number of bank-owned homes is down from a peak of nearly 700,000 in September 2008. After that, changes to accounting rules and the introduction of government loan-modification programs prompted banks to slow down the process and led to a drop in the volume of bank-owned properties throughout 2009.

Bank-owned foreclosures began rising again in 2010, peaking at around 600,000 that September, when banks again slowed down foreclosures, this time amid the “robo-signing” scandal. Since then, banks have been very slow to process foreclosures, particularly in judicial states, where courts are overwhelmed by the volume cases and banks have struggled to properly document their ownership of mortgages.

But the problems haven’t been limited to so-called judicial states such as Florida, New York, and New Jersey. Non-judicial states such as Massachusetts and California have recently passed laws imposing new requirements on banks before they foreclose, which is likely to further slow down the process. In Nevada, a new law that took effect last fall has brought new foreclosures to a virtual standstill.

Listings of foreclosed properties have fallen in 17 of the last 19 months through July, according to research firm Zelman & Associates. Listings are down 47% from their October 2009 peak and by 23% from one year ago. Banks are selling more homes to investors at courthouse trustee sales, rather than taking them back themselves. They’re also approving more short sales, where the property is sold for less than the amount owed.

“If you don’t understand the shadow inventory, it’s very ominous and concerning,” says Ivy Zelman, chief executive of Zelman & Associates. “But if you understand the flows and how it is brought to market” it looks less intimidating, she says.
Nationally, Barclays estimates that the number of bank-owned properties will decline a bit more this year, before accelerating next year to a peak of around 575,000 in early 2014.

Meanwhile, as the shadow inventory has dropped over the past year and as banks and states have slowed down the process, demand has picked up. That’s especially the case for foreclosed properties at low price points that can be held as rental properties by investors, or rehabbed and flipped for a profit. Investors are raising billions of dollars to buy homes in hard-hit markets such as Phoenix, Atlanta, Las Vegas, and across Florida and California.

“What most of the bears aren’t focused on is understanding demand,” says Ms. Zelman. This is one reason she’s turned bullish. Her most recent forecast calls for a 5% increase in home prices this year, a change from her initial forecast of a 1% decline when the year began. Getting a handle on demand “allows us to have a complete picture of the housing market.”

Finally, shadow inventory isn’t a national phenomenon. Instead, it is heavily concentrated in particular markets—and within those, in particular submarkets. To the extent banks to ramp up the foreclosure process, the shadow is more likely to resemble a “tornado” than a “flood,” as it will strike particular communities while bypassing others, says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm.

So when people use the “shadow inventory” trump card to argue that housing is poised for another decline, it’s important to be precise about which market they’re talking about. “It’s not like you have all these properties distributed all across the country,” says Michael Sklarz, president of Collateral Analytics, a Honolulu-based research firm.

Buyers in Santa Monica, Calif., shouldn’t “expect a flood of foreclosures to come onto the market,” says Mr. Sklarz, even if neighborhoods just a few miles away in South Los Angeles do face a larger backlog of foreclosures. “You really have to look at it market by market,” he says.

This is the second of three posts examining the shadow inventory.

To view the online article, please click here.

About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, Ohio and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees  and a handful of contractors performing services in the Midwest, to a national company with nearly 1,000 employees. Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.


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