Shadow Inventory

[irvinehomeowner]

This is a very interesting post from OCReader:

http://www.ocreader.com/forum/viewtopic.php?f=151&t=1347

I still think that "flight to quality" areas are less affected by this because there is a demand for product that exists there that doesn't in others that allow banks to hold, trickle out or turn over to flippers.

 

[Liar Loan]

Here is my update on the shadow inventory and some brief analysis:
http://www.ocreader.com/forum/viewtopic.php?p=16905#p16905

 

[irvinehomeowner]

It's because shadow inventory has become just that... a shadow.

It's not the tsunami people have thought it would be and it still comes up... but the wave never crashes.

 

[Liar Loan]

Exactly.  Most of those predicting a tsunami failed to realize that banks have only so much capacity to process foreclosures.  The servicing fees they receive are simply not enough to justify massive hiring increases to get things processed quicker.  Still, I think it's worth studying because the shadow inventory represents the oversupply in the market.  It needs to be cleared out before things can begin functioning normally again.

 

[usctrojancpa]

Exactly.  Most of those predicting a tsunami failed to realize that banks have only so much capacity to process foreclosures.  The servicing fees they receive are simply not enough to justify massive hiring increases to get things processed quicker.  Still, I think it's worth studying because the shadow inventory represents the oversupply in the market.  It needs to be cleared out before things can begin functioning normally again.

The big question is how long it'll take for that shadow inventory to clear out....I'm thinking at least 5-7 years....like a slow bleed.

 

[irvinehomeowner]

So say the banks had all the manpower to process these foreclosures... do you think they actually would?

I do think there are some shenanigans on the bank side to drag their feet (which is one of the original arguments of why shadow inventory exists in the first place).

I think what people underestimated was how long banks would allow people to not pay their mortgages... it's not just stories you read about... I know of at least 2 to 3 people who have not paid in over a year (I think one went to two years).

 

[usctrojancpa]

So say the banks had all the manpower to process these foreclosures... do you think they actually would?

I do think there are some shenanigans on the bank side to drag their feet (which is one of the original arguments of why shadow inventory exists in the first place).

I think what people underestimated was how long banks would allow people to not pay their mortgages... it's not just stories you read about... I know of at least 2 to 3 people who have not paid in over a year (I think one went to two years).

Of course they wouldnt.  Banks cant handle taking huge losses all at once, but when you spread those losses out over years and years they become a lot more manageable. 

 

[so_scared]

So say the banks had all the manpower to process these foreclosures... do you think they actually would?

I do think there are some shenanigans on the bank side to drag their feet (which is one of the original arguments of why shadow inventory exists in the first place).

I think what people underestimated was how long banks would allow people to not pay their mortgages... it's not just stories you read about... I know of at least 2 to 3 people who have not paid in over a year (I think one went to two years).

Of course they wouldnt.  Banks cant handle taking huge losses all at once, but when you spread those losses out over years and years they become a lot more manageable.

Where would the bank's loses come from? From their HELOC and 2nd portfolio? From put backs? The majority of the mortgages themselves are owned by GSE or investors aren't they?

 

[usctrojancpa]

So say the banks had all the manpower to process these foreclosures... do you think they actually would?

I do think there are some shenanigans on the bank side to drag their feet (which is one of the original arguments of why shadow inventory exists in the first place).

I think what people underestimated was how long banks would allow people to not pay their mortgages... it's not just stories you read about... I know of at least 2 to 3 people who have not paid in over a year (I think one went to two years).

Of course they wouldnt.  Banks cant handle taking huge losses all at once, but when you spread those losses out over years and years they become a lot more manageable.

Where would the bank's loses come from? From their HELOC and 2nd portfolio? From put backs? The majority of the mortgages themselves are owned by GSE or investors aren't they?

Whatever loans they didn't sell, second mortages (including HELOC), Fannie Mae MBS bonds they own, put backs from faulty underwriting, and the loss of servicing income.

 

[Liar Loan]

The big question is how long it'll take for that shadow inventory to clear out....I'm thinking at least 5-7 years....like a slow bleed.

My prediction is for 3-4 more years based on the CURRENT pace of dispositions (more detail in the OC Reader post). However, I'm expecting BofA and, to a lesser extent, the other banks to speed things up in 2012, so that would bring it down to maybe 2.5-3 more years.  This is one reason why I expect home prices to show organic strength in 2014.  Without the oversupply of shadow units, and with next to no homes being built on a national scale, there is going to start to be a shortage of homes.

So say the banks had all the manpower to process these foreclosures... do you think they actually would?

Yes, at this point I think they would.  The intentional holding back was occurring in '08-'09 when nearly all the banks were facing capital shortages.  Now they are well enough capitalized to take the losses.  The single biggest obstacle these days is the government.  My company has a checklist of about 35 different requirements that have to be met before a loan can be referred to foreclosure.  The HAMP program alone requires something like 10 different contact attempts be made, each with a 15-30 day waiting period for the borrower to respond.  Now, the pending settlement between the large banks and the 50 state AG's is going to add even more requirements that have to be met.  One of them is that a foreclosure cannot be processed simultaneous with attempting to qualify a borrower for a mod.  This has the potential to slow things down immensely.