“Buyers keep asking about the shadow inventory of bank owned homes for sale. Buyers are frustrated by the low inventory. Even $600k buyers may get one new listing to see a week, sometimes less. But it does not appear to get better anytime soon. Rising mortgage delinquencies caused by unemployment, and rising bars on foreclosure charts do not mean that more bank owned homes will hit the market, as long as the owners of those mortgages are preventing them from doing so. I cannot overemphasize this, so I will repeat it a few more times. As long as banks don’t want to sell their distressed real estate, it does not matter how many homes enter foreclosure.
We believe that bank owned housing inventory will only increase when banks decide to sell these homes. Since this downturn began, there has been interference in the natural process of delinquencies turning into foreclosures. Still, for those who are curious, we searched for shadow inventory.
We searched property tax records and found about 6000 bank owned homes not yet on the MLS. Before you get excited, note this is the same number we counted at two different times in 2007. While some banks move their homes onto the MLS within one or two weeks of the foreclosure auction, others delay for many months.
Thus, it appears the real shadow inventory is in the delays in each step of the foreclosure process. First, servicers delay in sending out Notices of Defaults (NODs), the first step in the foreclosure process. We estimate, using data from American CoreLogic and ForeclosureRadar.com, that 40,000 – 80,000 San Diegans are at least 90 days delinquent on their mortgage and have not received an NOD.
Next, servicers delay in filing Notices of Trustee Sale (NTS), which assigns an auction date for selling the home on the courthouse steps. They delay scheduled date of the sale by many postponements and cancellations. And finally, they delay in putting the bank owned homes on the MLS for sale.
Mortgages are owned not just by banks, but also by pension funds, endowments, foreign central banks, and fixed income funds. Many readers are likely invested in mortgages in some way in their retirement accounts. The fund managers and ultimate owners of mortgage backed securities, CDOs, and CDO squared are likely delaying the foreclosure process, in hopes that an economic recovery raises the prices of these homes, and prevents the recognition of losses on their financial statements. Add to this foreclosure moratoria, and political pressure to modify rather than foreclose, and it is likely that the bank owned inventory will remain depressed for years to come.
All the rising delinquencies, so dutifully covered by the media, means nothing to the housing supply, if those homes are prevented from ever coming on the market.”
