THE BLOG

The Truth Behind Foreclosure Crisis 'Recovery': Spotlight on the Shadow Inventory

05/15/2010 05:12 am ET | Updated May 25, 2011

There was a great story in the Washington Post on Friday illuminating the discrepancy between current, lagging foreclosure numbers and the huge number of homeowners who are actually seriously defaulting on their mortgage loans. As the reporter notes, we currently have a "shadow inventory" of distressed homes looming in this country, which means the current slowdown in foreclosures is a misleading indicator of long-term recovery. Many properties are in a state of 'pre-foreclosure' purgatory, backlogged on the books of financial institutions which have not completed the foreclosure process on the properties and put them back on the market for resale.

Beyond the shadow inventory's downward effect on home prices -- which the article describes in good detail -- there is a greater issue lurking under the radar: the stability and vitality of hundreds of local neighborhoods across the country. Large numbers of vacant homes give rise to a host of damaging side effects within communities. Increased crime and safety issues, including threat of fire and vandalism, and widespread property deterioration severely hampers community health.

But there is opportunity that lies within: intervening earlier with properties in the 'shadow inventory' could help stabilize communities that otherwise will be facing an inevitable glut of empty houses in a year or two. Local housing providers can now find these distressed properties that may be in pre-foreclosure status and add them to the queue of projects to revitalize neighborhoods.

The best long-term solution in some cases would be to extend to defaulted homeowners willing to leave a graceful exit strategy, while allowing localities with public resources earlier access to acquire those properties for renovation and resale. The earlier in the process communities can gain control of assets, the less likely the deteriorating effects of vacant properties will be wrought on at-risk neighborhoods.

In neighborhoods where housing values have fallen steeply, this strategy would keep multiple properties from falling into the hands of speculative investors who may defer maintenance to maximize profits and do not hold a long-term stake in a community as would an owner occupant who would call that neighborhood home. It's this type of proactive thinking, done collaboratively with all parties on the ground - including lenders, local housing agencies and nonprofit partners - that will be our best hope for turning around the current foreclosure crisis.