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

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.

 

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Comments

[valkyre]

02:41 PM on 03/17/2010

There are many effective things we could do to stem the flow of foreclosures, if anyone in the gov't gave a crap about anything other then preserving the corrupt players that dominate the financial system and making a couple token-efforts so they can say they are doing something for the people.

They could...
1) Follow what we did in the Depression and create a gov't bank that purchases delinquent loans at market prices from banks and then works with homeowners to reduce principle, extend loan terms, and allow grace periods without payments and all those flexible things that you can do when the point is to stop foreclosures. This agency closed in the 40's after accomplishing its goals and even a small profit.

2) rewrite bankruptcy laws to allow principle write-downs.

3) allow a gov't agency instead of banks to decide who qualifies for the HAMP program and enforce that banks accept their decision

4) Purchase foreclosed homes and allow then to rented back by former owners at market rates.

5) Purchase empty foreclosed homes that have been damadged and offer a public works program that hires unemployed people to repair and upgrade these homes and allows then to apply to live in completed projects at a discount as part of there wage. Other completly abandoned neighborhoods could be purchased and demolished and turned to parks.

[karen1p]

08:28 AM on 03/18/2010

The reason that they can't do any of this is because the banks that are "servicing" never lent the money. They have never owned the deed and to expose this would be to expose the massive fraud that continues to occur. Securitization is illegal....it separates the note from the deed and it goes against centuries old real estate law. And for the banks and the government to come out and tell people that all the securitization is illegal, would be unprecidented. That would literally mean that not one mortgage that was sold in the last decade is legal and enforceable....but seriously, that is the situation.

[pjwrites]

04:47 PM on 03/18/2010

"Securitization is illegal. it separates the note from the deed and it goes against centuries old real estate law."

Why can't I find anything online that confirms your point? Please direct us to a source which confirms these laws, if possible.

[lightningbolt]

01:47 PM on 03/17/2010

The worst part is that there is another bigger wave of foreclosures coming, both in residential and commercial properties. We've only gone through the beginning of the economic crisis and the government's actions so far have merely postponed the main part of the crisis.

[jcaunter]

07:45 PM on 03/16/2010

And there's no local government willing to gamble that housing prices aren't still sinking.

[taikan]

06:37 PM on 03/16/2010

"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."

I'm not sure what state (or what fantasy world) the author lives in, but I am confident that there are no localities in California with the "public resources" to acquire homes for renovation and resale.

[DuganS1]

04:39 PM on 03/16/2010

Banks are stalling the process. They don't want to modify loans or foreclose houses because they'll then be forced to write down their own assets (the loans). For many US banks, if they wrote down all their loans today, they'd be insolvent. As for people in the foreclosure process, the average length of time it's taking to foreclose is 14 months after their last payment. That means that millions of people have been living house-payment/rent free for a long time. That is actually good for a lot of families. Plus, it keeps the retail spending numbers looking a lot better than they should be.

[chtorr]

04:49 PM on 03/16/2010

Except where someone is just not paying even though they have the means, stockpiling their cash.

[valkyre]

02:28 PM on 03/17/2010

I used to always talk to a homeless man that played guitar and sold the homeless newspaper outside my work. He was homeless until a subprime mortgage lender began holding seminars at his homeless shelter. Many homeless residents qualified for a no doc, no downpayment, no credit loan. His was actually a Jumbo loan on a McMansion; his plan was to resell that for a profit and buy a cheap house in the ghetto neighborhood with his profit. As he now lived in a nice neighborhood he was able to start a landscaping business and did actually make a few payments between himself and the other formerly-homeless workers living there. But when the crisis hit they stopped making enough money to cover the mortgage, so they stopped paying. He lived there about a year before they locked him out. He broke in a couple days later and still lived there now. The property has not been listed on the market yet; most propertied in the neighborhood are already for sale or unoccupied. He has not been able to get the water or electric on yet, so hauls in water jugs and uses the 3 beautiful fireplaces for heat.

[PSdesert]

03:15 PM on 03/16/2010

Why are banks not accepting modifications that lower the principle? They could avoid the $20-50k it costs for forclosureand let the homeowner stay in the property. They could even keep the principle about 10 or 15% higher thean they think it would sell in short sale or forclosure sale. Seems like a win-win for the bank and homeowner.

[jcaunter]

07:48 PM on 03/16/2010

You haven't been paying attention. Banks are making more money by kicking people out of their homes thanks to a little thing called "credit default swaps".

Banks have a strong incentive to throw people out of their homes when the market value falls below a certain dollar amount. That's why AIG collapsed.

[karen1p]

08:34 AM on 03/18/2010

You got it! Payday for the banks come when the default notice is sent. They slap themselves on the back and pocket their bonuses.....and watch another homeless family.

Stay and fight. These institutions don't have the paperwork. They have destroyed the original paperwork exposing their massive fraud. Educate and stay put. You are the only one who owns your property.

[oldpotsmuggler]

03:45 PM on 03/15/2010

If they're not yet foreclosed on, they're likely not yet vacant. If there is money to fix them after the homeowner leaves, why not use that money to try to help the homeowner stay?