Emerging From the Shadows
Emerging From the Shadows
In the aftermath of the recession and its related housing crisis, speculation swirled that a massive backlog of REO, severely delinquent, and foreclosed homes could hit the market and submerge home prices and any trace of a housing recovery. While the threatened tsunami of shadow inventory has largely been downgraded—mitigated by rising home prices and investors’ bulk purchases of foreclosed homes—some real estate professionals believe a shadow inventory still looms with a riptide-like potential to drag the housing recovery off course.
Although shadow inventory is trending down, some practitioners envision a scenario that could cause it to swell again. Instead of being a tsunami, the hidden supply of properties may prove to be more like an algebraic equation—the proverbial bathtub that is filling and emptying at unequal rates: While properties are being liquidated, others are entering the mix, pushed there by new market dynamics.
But pinning down the scope of the shadow inventory has always been challenging. Generally, it amounts to the total number of delinquent mortgages plus bank-owned and foreclosed properties not included on the MLS. It is difficult for real estate professionals to assess any market where tight inventory must be reconciled with a “hidden” supply of vacant homes. “I think the average agent doesn’t know if there is shadow inventory out there,” says Brian Kassis, ABR, SRES, a team leader with RE/MAX Gold in Sacramento, Calif. Kassis expresses the sentiment of many in the industry: “I think the banks and the government want that info to be muddied.”
Diving Into the Numbers
CoreLogic’s January 2014 National Foreclosure Report removes some of the mystery by pegging the shadow inventory at 1.7 million homes—down half from 2010 peak levels. CoreLogic defines shadow inventory as homes with mortgages that are 90 or more days delinquent and potentially moving into foreclosure to become real estate–owned properties in the for-sale inventory, though they are not yet listed on multiple listing services. Interestingly, nearly half of these properties are severely delinquent and have not entered the foreclosure process. These properties are truly in the shadows.
The Mortgage Bankers Association, tracking loans that are seriously delinquent (90 or more days) and those in the foreclosure process, finds that 5 percent of all serviced loans (approximately 2.3 million loans) are seriously delinquent, down from 10 percent in 2010. “A lot of loans are just sitting there,” says Joel Kan, the MBA’s director of economic forecasting. “We’ve come a long way, but it’s still a big number. Seventy-five percent of these loans were made in 2007 or earlier, and these are loans that could not be helped by HARP,” says Kan, referring to the federal Home Affordable Refinance Program, which was created to help underwater home owners refinance their mortgages.
John Grant, a Washington, D.C.–based housing lobbyist representing residential investors who buy and rehabilitate properties, says, “The shadow inventory has dropped significantly.” However, the CoreLogic data reveals 800,000 to 850,000 mortgage holders who are extremely delinquent, have stopped paying on their mortgages, and have no hope of catching up, and that concerns him. “You cannot modify your way out of this,” he says, observing that some state laws (including the 24 states with a judicial foreclosure process) are enabling these individuals to live mortgage-free, and MBA data confirms that 70 percent of loans in foreclosure are in judicial states, with New Jersey and Florida holding the largest inventories of foreclosed homes (5.8 and 5.2 percent, respectively) and the highest percentage of loans that are severely delinquent (9.5 and 9.6 percent, respectively). RealtyTrac has reported that the average foreclosure timeline in the first quarter of 2014 had stretched to a record-high 572 days, and to three years in some states. “This needs to be addressed to return to a normal market,” Grant adds. “I’m in favor of getting distressed owners out of a bad situation as painlessly as possible.”
The notion of living mortgage-free is familiar to Kassis. “I know people that I’ve sold homes to who haven’t paid their mortgages in three to four years. It’s bizarre that this continues to happen,” he says.
Kassis, a 26-year real estate veteran, has managed REOs for several institutions since 2008, as well as in previous down markets. While his REO inventory was 125 properties not that long ago, his current inventory is just eight properties. Independent banks, he says, are giving far fewer properties to real estate agents, and the government-sponsored enterprises, Fannie Mae and Freddie Mac, have changed how they distribute properties to asset managers; while agents previously had relationships with asset managers, today the properties are assigned randomly. This slowdown, Kassis speculates, “is closely tied to the institutions wanting to get prices up.”
Shadow Inventory Redefined
To reflect the pool of home owners unwilling to sell and purchase new homes because their current mortgages are at a below-market rate, CoreLogic recently added “properties of rate-disenfranchised sellers” to “properties that are more than 90 days delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers, but not currently on multiple listing services.” —CoreLogic’s Chief Economist, Mark Fleming
Grant echoes Kassis’ view: “We hear that the housing inventory is tight, but I’d submit it’s artificially tight. There is a large block of properties that should be considered inventory.”
The GSEs hold significant portfolios of distressed properties, and each is taking a different approach to liquidating them. Meanwhile, in 2012, HUD began liquidating properties, typically for 50 to 60 cents on the dollar, to Wall Street firms, investors, nonprofits, and local investors via national and regional auctions, says HUD. As recently as June, HUD assembled 16 pools of homes (23,000 defaulted single-family homes) in a sealed-bid auction through its Distressed Asset Stabilization Program, which bundles loans from a cross-section of the country, and the Neighborhood Stabilization Outcome, which bundles defaulted loans from a specific market. The winning bid for both sales was Loan Star Funds, a global private equity firm, whose bids were weighted at 77.6 percent of the collateral value. DASP requires buyers to delay foreclosure for six months, during which time the new loan holder is expected to work with the borrower to avoid foreclosure. According to HUD, since the buyer’s purchasing at a discount and the loan is sold without FHA insurance, the new loan holders are encouraged to allow loan modifications and, under NSO, principal reductions. These auctions are likely to continue for several years.
Freddie Mac: No Discounts
On the other hand, Freddie Mac’s HomeSteps.com has a network of 2,000 real estate agents and growing who are listing brokers for its portfolio of distressed properties. Rather than discount its properties, Freddie Mac prices properties net 95 percent of current market value. “We don’t look at this as an exercise in trying to dump properties,” says a Freddie Mac official, who notes that doing so would only lower the value of other nearby homes with Freddie Mac mortgages. Jenni Ruiz, broker-owner of JS Ruiz Realty Inc. in Indianapolis and a HomeSteps listing broker, attests, “Freddie Mac’s goal is to get fair market value for their properties. They have changed the way they market properties,” she says, citing the First Look Opportunity Initiative, which grants buyers and nonprofits the opportunity to purchase HomeSteps homes before investors. “They listen to my recommendations; emergencies are addressed to minimize the risk of damaged properties, and closings are quick,” Ruiz says.
Earlier this year, Fannie Mae launched HomePath for Short Sales, a website open to real estate professionals working on short sales involving a Fannie Mae–owned loan. This initiative aims to mitigate issues and streamline the short-sale process.
Short Sales in Limbo
While Fannie Mae has stepped up its short sales efforts, home owners are still feeling cautious. The Mortgage Forgiveness Debt Relief Act of 2007, which offered tax relief on forgiven mortgage debt, expired on Dec. 31, 2013. (The National Association of REALTORS® has been actively working to extend the tax relief provision and believes Congress will pass an extension late in 2014, and make it retroactive.)
For now, bankruptcy and foreclosure seem like the most viable avenues available to distressed home owners. Evan Cunningham, SFR, an agent with Max Broock, REALTORS®, in Birmingham, Mich., reports his southeast Michigan market is “picking up” with one exception: “In the last six months, short sales have stalled and stopped.”
Similarly, Ruiz says the Indianapolis area saw a 13 percent drop in short sales in the first half of 2014 compared with the same period in 2013. Ruiz suspects many deals are in a holding pattern as underwater home owners eye Washington, hoping for an extension. Cunningham worries about the effects of Congressional inaction. “We’re concerned about a big bump in foreclosures in the next six to 12 months. If we want to continue toward a healthy market, it’s imperative that Washington extends the legislation,” he says.