Discuss Meaning of 'Shadow Foreclosures'?

chisueSeptember 30, 2010

Do we know what percentage of US homes are mortgage-free? I remember a one-third figure from some years ago.

I'm reading gloom and doom stories about foreclosures still in the pipeline. What's the rest of the story?

Our Chicago Tribune today reports that 20% of homes with mortgages in the Chicagoland area (Cook, collar counties and The Great Beyond) are at risk -- from 30 days late in payment to much worse. It says that 80% of these are expected to result in foreclosure.

So...80% of 20% of 66%... Is that saying that 10% of all Chicagoland homes are likely to go on the market as short sales, in auctions, etc.? Is that different from stats for the last two years? Just a prolongation or something new?

Yes, it IS a Big Deal, but how big? When I tried to Google for info I came up with articles on The End of the Middle Class. (Home ownership being long-valued as inheritable wealth.)

I'd guess the percentage of the population renting has increased too. Perhaps that's only returning to a norm after too many 'homeowners' were unable to sustain mortgages once the 'lure' rates increased.

Care to comment?

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dave_donhoff

Hi Sue,
Anecdotal take here from 'just me' with my thumb on the pulse both professionally and as a real estate investor;

I think the 10% number is probably conservative. More than 10% of primary residences nationwide (even after discounting the approx. 30% who have no liens) are in default.

Remember that the density of homes are on the coastal fringes (including your lake coasts,) and were driven to greater price inflation during the credit-pushing era of the Fed Government & Wall Street... so on the coastal band, the default numbers are *MUCH* higher than 10%

Further, "strategic non-foreclosure" is prevalent with the banks & servicing companies. That is; rather than serve notice of default on a 90+ day delinquency, and declaring to the financial (and regulatory) world another bad loan on their books, they're merely biting their tongues & waiting it out in hopes they'll somehow be saved by a recovering market, or more stimulous handouts from the taxpayers.

We remain in very interesting times...

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   September 30, 2010 at 8:43PM
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patser

"That is; rather than serve notice of default on a 90+ day delinquency, and declaring to the financial (and regulatory) world another bad loan on their books, they're merely biting their tongues & waiting it out in hopes they'll somehow be saved by a recovering market, or more stimulous handouts from the taxpayers."

Dave, Please provide a creditable source, regulatory or otherwise, that indicates banks aren't putting non-performing loans into that status.

    Bookmark   October 1, 2010 at 4:49AM
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Billl

I think you need to take all predictions with a grain of salt. There are certainly some areas that were incredibly overbuilt and where most of the owners were basically speculators. Prices there are already depressed, may continue to fall in the short term, and probably won't rebound anytime soon. In those areas, you will certainly continue to see fallout from the crisis in both foreclosures and short sales.

For the rest of the country though? I'm not nearly that pessimistic. Unemployment has basically bottomed out. As that improves, foreclosures will drop too. You'll still see short sales though until property values come back up, and that could take an extended period of time.

Re: "strategic non-foreclosure" - NPR did a story a couple months ago about people who thought they had been foreclosed on. The lenders had sent notice and the homeowners decided not to fight it and just moved out. Months later, the owners got property tax bills. The lenders never followed through on the foreclosures!

    Bookmark   October 1, 2010 at 8:42AM
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dave_donhoff

Hi Patser,

Do you consider me creditable (or even credible?) I have a property under contract with a seller who has not paid her mortgage payment (1st nor 2nd) for over 18 months now, and has received not a notice nor phone call from servicing.

I know you don't know my friends & associates, but I know a *LOT* of real estate investors with similar experiences.

There are articles about this constantly... plug it into your radar scanner, and you'll see such articles yourself. (I'm not going to go run a search now... too many other things to deal with at the moment.)
===========

Hi billl,

Your reference to strategic non-foreclosure is a real issue in smaller-priced heartland areas... a real headscratcher of a problem too... BUT, not what we're talking about regarding "shadow inventory/foreclosures."

The NPR story (and others) highlight publically *KNOWN* defaults that are simply ignored *AFTER* notice by the banks.

There is a massive accumulation of defaulting homeowners who've simply never been served. The question then is "why."

Of course, there can potentially be multiple reasons;
A) the note's been shuffled amongst so many servicers it fell in the cracks,
B) the servicers have been shuffled as they have failed & been merged/bailed/bought, thus, back to the swallowing crack,
C) the servicer is playing a waiting game (which leads to further "why" questions.)

BOTTOM LINE, however, is that there are a LOT of non-declared, non-notice-served defaulters "at large" presently.

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   October 1, 2010 at 5:01PM
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Gina_W

Chisue, here's a good blog for you to peruse, if you have the stomach: Dr. Housing Bubble

Shadow inventory and a second housing bubble have been written about by plenty of good RE prognosticators on different blogs for years now. Lately, the mainstream press has co-opted the "shadow inventory" and associated terminology like the good little sheep that they are.

(I shouldn't be so mean to them, they don't have the experience or depth of knowledge to write about much of the complicated crap going on these days except to paraphrase what comes off the PR ticker.)

Anyway, this crap ain't even close to being done yet, for a variety of reasons. We are still waiting for the bulk of foreclosures and soon-to-be foreclosures to come down the sales pike. Fed programs to help underwater buyers and "stimulate" the housing market have not worked out, and only served to delay the inevitable.

The "second bubble" writers basically say that the fed has continued the madness and feed the future-foreclosure market by giving mortgages to people with little or no money down (3%!!!). Still helping those with not great credit, no money down and many times, no business buying a home to get into the great American housing market, even today. During the current bubble. During a period where these new homebuyers will be underwater very soon - on homes where they have no "skin in the game". Crazy isn't it? You betcha.

    Bookmark   October 1, 2010 at 5:35PM
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chisue

Great. I was trying to find a way to 'moderate' the bad news. Now you all are telling me, "There, there, dear, it's not as bad as you thought. IT'S MUCH, MUCH WORSE!"

gina -- We couldn't agree more on media. DH and I place bets while channel surfing the nightly news -- to see which station will run which 'over the transom' story in what order. (DH has a MSJ. O! The language! LOL)

Many thanks to all for your thoughtful replies! So...what's a person to do to preserve savings these days? Cash out of the market? (Buy guns -- or a cow?)

    Bookmark   October 1, 2010 at 6:22PM
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jane__ny

What about the news reports yesterday and today that Chase and Bank of America are halting all foreclosures because some have gone through when they should not have.

What is this all about and is it truthful?

Jane

    Bookmark   October 1, 2010 at 10:19PM
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dave_donhoff

Hi Sue,

So...what's a person to do to preserve savings these days?

If preservation is your priority, insured accounts (Fed or state) are the way to go, IMO. If you want better than what fixed accounts are offering, you can get insured indexed accounts that match the market, have a no-loss "zero floor" and a ceiling cap, so you get the range of growth in the upside channel (generally around 6-8%.)

Cash out of the market? (Buy guns -- or a cow?)

If you go all into cash, you're then vulnerable to the currency dilution/devaluation from all the government monetary "stimulus" (printing.)

Guns & a cow? I know folks who don't take that as a joke either ;~)

================

Jane,

What about the news reports yesterday and today that Chase and Bank of America are halting all foreclosures because some have gone through when they should not have.
What is this all about and is it truthful?

Definitely truthful... a couple days earlier GMAC announced the same (they were the 1st to be hit by the class-action attorneys.)

What's the effect? More congestion & delay in the orderly & organized settlement of the markets... more defaulting borrowers holding more inventory back... and more of the announced lenders & all the unannounced lenders CEASING any default notifications on those they may have otherwise proceeded on.

In short... more trouble, lasting longer, unfortunately.

Luck to us all!
Dave Donhoff
Leverage Planner

    Bookmark   October 2, 2010 at 12:03AM
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patser

Dave, Thanks for replying. I believe you have equated loans which aren't being actively chased down by a bank as being synonymous with loans being put on/not put on non-performing status. In my experience, doing that is a mistake. There are Tier 1,2,3 capital rules for regulated banks that apply to how loans are classified. There are FASB accounting standards that apply to loan accruals/ classification. There are IRS rules for loans.

I would suggest that assumptions relating a delinquent borrower who isn't being contacted by the lender to the performing or non-performing status of the loan on the books of the bank is unfounded without intimate knowledge of the bank's bookkeeping. However, looking at any bank's quarterly financial statements these days shows substantial increases in non-performing loans, at least through the second quarter 2010.

    Bookmark   October 2, 2010 at 5:58AM
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krycek1984

patser, I'm going to look into that a little bit because it is of interest to me, as a student of accounting. The FASB is very specific as to rules on when and how to "write off" bad loans, etc., but it is also my understanding that the banks have been given a wink and a nod to basically not follow those rules at this point in time to prevent further financial meltdowns.

Concerning IRS, that is a different subject than any GAAP rules that the FSAB implements.

I'm going to do a bit of research, maybe ask a professor or two, and see what's really up. It's a very interesting and timely issue.

    Bookmark   October 2, 2010 at 11:01PM
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patser

krycek, No offense to academics and students, but I'd put my money with people who are actually working with regulators and auditors.

    Bookmark   October 3, 2010 at 10:43AM
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dave_donhoff

patser,

If the servicing affiliate of a major mortgage bank was simply sand-bagging defaults (not following protocol to move them along the bookkeeping chain as defaults)... how would you know?

What good would it do to look at published accounting reports? Wouldn't be there.

All the research in the world won't do you any good *UNLESS* you run a granular audit at the level the sandbagging is happening... and there are plenty of ways to shift things around if the servicers have any reason to expect the potential of an audit.

I know the facts; That there are *TONS* of defaulting borrowers who have not received any 90-day legal notice to begin the foreclosure process.

You can weave whatever reasons & causes into that fact you wish. I can only think of a few reasonable justifications... the most glaringly likely is that the delays are intentional by the servicing companies responsible for executing the processes.

Much in the mortgage documentation process *WAS* lost in the cracks of inefficiency... but no where near enough to account for the street level unpublished default inventory that is out there right now.

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   October 3, 2010 at 1:23PM
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chisue

On "Buying and Selling Homes" forum on this topic, there's a link to the MERS situation in Florida. A mortgage firm says that it holds a mortgage on a defaulted property simply by claiming it! What a gig: "Dibs! It's mine and I'm foreclosing on it, selling it and writing the new mortgage for the buyer."

Nobody know who owns what, courtesy of the weak regulations under Bush et al.

    Bookmark   October 4, 2010 at 1:24PM
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prairiemoon2 z6 MA

I was reading another source of similar bad news...is anyone familiar with this website... patrick.net? It was the first time I ran across it and it's quite discouraging.

Here is a link that might be useful: Housing Crash Continues

    Bookmark   October 6, 2010 at 3:43PM
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bushleague

It is much worse as the news with Brian Williams pointed out tonight, and now with foreclosures on hold, it's going to be like the Toyota dock in Boston Harbor with no place to go. My 2010 contributions are pretty much going in the Street as they did in '09. My "Nuts and bolts of America" portfolio shines year in, year out, and yes I own Apple, lots of it.

    Bookmark   October 14, 2010 at 11:21PM
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