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It’s High Noon on Shadow Inventory as Banks Halt Foreclosures

By
Mortgage and Lending with iLoan - NMLS ID#1947845 NMLS 79048

So Ally's GMAC, Bank of America and J.P. Morgan Chase are halting foreclosures in 23 states.  More importantly, Fannie Mae and Freddie Mac have stepped in to outline correct foreclosure processes and are demanding lenders adhere to them.  What's more, many more lenders are sure to follow the big 3's changes.  That's great but what does it mean for us?

Is this a short term thing or will it take a while to fix?  With the threat of civil suits, government or SEC investigations and even Justice Department prosecutions (mail fraud and wire fraud), you can bet that lenders will slow way down and make sure they get it right.  The days of "robo-signing" and scant reviews of legal documents in foreclosure proceedings are gone.  Even when foreclosures start up again, it will be a much slower process because (imagine this) people will have to do the work, not computers.

Why should we, as real estate professionals and homeowners, love this?  Simple.  Instead of releasing a glut of discounted bank-owned properties into an overcrowded winter market, lenders will be holding onto these properties longer while these technical issues are sorted out.  There was recently very good news in our market and the largest threat to it was the aforementioned wave of bank owned properties hitting the market over the naturally slower winter months.  These sales would depress values and make appraisals difficult during the spring market.  With the advent of these lenders having to get this process fixed and halting foreclosures, that headwind has stopped blowing.

It has been said that it would be better if these foreclosures were just pushed though the system.  "Just get it over with," they say.  This is not the best approach, however, for someone who cares about home values, wants a soft landing for the real estate market, and a smooth recovery  (in short, anyone who owns a home).  When the job market recovers, we'll truly be able to exhale and trust in the health of real estate again but until then, any measure of "kicking the can" or anything that spreads this crisis out over a longer period of time is welcome.

Regardless of whether one thinks this is a good thing or a bad thing, it is what it is.  Home values are less threatened as a result and the hourglass has more sand in it as we wait for fuller employment.  For now, that long shadow we thought these lenders' inventory might cast won't be with us as early as anticipated.  It's still high noon.

Affected states include: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.

Posted by

Charles Dailey - Branch Manager, Loan Officer, Certified Military Housing Specialist - iLoan - NMLS ID# 79048 -  612.234.7283 - charles@charlesdailey.com


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Comments(60)

Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi Charles,  Iagree that this new situation will mandate a more thorough review of each case file.  That in turn will slow the process and perhaps push more buyers over to the non-distressed side of the market. 

Oct 05, 2010 04:24 AM
Keith Sellers
Sellers Real Estate - Kalamazoo, MI
Greater Kalamazoo and Lakeshore

Very interesting comments ~ thank you for posting and commenting.

Oct 05, 2010 04:51 AM
Keith Sellers
Sellers Real Estate - Kalamazoo, MI
Greater Kalamazoo and Lakeshore

Michael ~ I like the solution oriented approached offered.  But aren't they afraid of setting a precedent by such a fix?  Honestly, it looks like a sensible approach at first glance, but that would be like the monkey that gets his paw stuck in the coconut when he has his fist clenched around what's inside.  He can't pull his fist out, but he refuses to let go.

Oct 05, 2010 04:56 AM
Becky Schertenleib, Nan Wimmers
Columbia Gorge Real Estate - The Dalles, OR
"sisters by chance, partners by choice"

I was relieved to see that oregon and washington where not states affected by the halt... i feel that this will create a tightening of the market driving prices up a bit only to be hit by a stronger downfall when the dam breaks on the halted foreclosures... i fell for those in the affected states it is going to be a "RIDE" we have to get these foreclosures off the books so the market can truly recover. thanks for the post its been a hot topic!

Oct 05, 2010 04:57 AM
Mike Frazier
Carousel Realty of Dyer County - Dyersburg, TN
Northwest Tennessee Realtor

I believe they need to accelerate these foreclosures so we can get them all behind us.

Oct 05, 2010 04:58 AM
Mike Morrison
Will & Will Real Estate Brokers, The Woodlands, Texas - Houston, TX

We are in the Wile E. Coyote runs off the cliff scenario, we're OK until we look down.I'm criticized for being too negative.  Compared to what?  A complete reset due to depression or hyper-inflation looks better than this slow bleed out of all things decent and productive.

Here's where we're at now:

1) If defaulted homeowner are allowed to stay put, you get no demand for housing from them. 2) If title ins. co's refuse to issue, you get no lending for REO sales. 3) If Joe Six-pack gets the next 6 mos. to 2 years rent-free, you get suppressed market rents. 4) Mr. "I got a deal @ 40cents on the dollar" investor who can't cover his carrying costs due to suppressed rental market now joins the ranks of backlogged foreclosures.  There is already a minimum 2 year inventory of REO (squat able, now) homes!!! So where does your increased demand come from again?

The end result is the recievers move in and bayonet the wounded and the lawyers move in after and strip the bodies.

Oct 05, 2010 05:02 AM
Barb Merrill
Cactus Mountain Properties, LLC - Tempe, AZ
GRI, Associate Broker

Many people want to stay in there homes.  Loan mods need to step up and more effectively serve the homeowners.  Here in Arizona, we have a glut of foreclosures and we have a glut of buyers who will purchase them.  Our economy will not stabilize until all the underwater properties both residential and commercial are recycled.

Oct 05, 2010 05:19 AM
Jerry Morse
The Morse Company - Janesville, WI
BBA,GRI

By the previous comments, there is certainly divided opinions on the ramifications of this.

Oct 05, 2010 07:31 AM
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

Hey they could turn their inventory into rentals . . . after all, isn't that what Time magainze's cover story suggested? 

I wrote a feature about this topic too.  My stance, which was not about the defaulted mortgages, but the cluster f*@k on the courts.  Just pushing those foreclosures through, many of the legal documents submitted were unread, "rubber-stamped," etc.  They pushed the loans through, now they're pushing the foreclosures through.  And by "they" I mean the banks/"servicers"

Mike #48 sums it up.  The lawyers are making a lot of money now with bankruptcy filings, etc.  They're moving in and are the VULTURS that strip the bones of any remaining flesh.

Oct 05, 2010 07:45 AM
sandra valdes
Avant Realty Group, LLC - Miami Beach, FL

Carla I agree with you regarding banks turning their inventory into rentals, that's a method that is being applied in Spain, the banks are leasing their inventory until the market recovers.  I don't know how well is working for them but its better than having vacant properties deteriorating and being vandalized until the issue gets resolved.

Oct 05, 2010 08:35 AM
David Selman
Selman Home Inspections, Inc. - Dallas, TX
Certified Master Home Inspector

Charles - Thanks for your insights and for educating me about some of the actions regarding foreclosures. From a home inspection perspective, it makes the market that much more difficult to navigate....

Oct 05, 2010 08:59 AM
Bob McCranie
Broker Associate / Team Lead - Texas Pride Realty Group - Carrollton, TX
Your best advocate when buying or selling your hom

I agree with Tim Maitski (RE/MAX Greater Atlanta).  This is more about Too Big To Fail more than it's about the home owners.  I don't frankly care if it slows the market recovery as long as people are not put out of their homes without due process.

Oct 05, 2010 09:13 AM
Uzi Husain
Keller Williams Integrity First - Scottsdale, AZ

hmmm, this post has generated a mixed response and I can understand why.  Here's my other concern, we know interest rates will not remain at historical lows.  It's only a matter of time before they start creeping up and once employment numbers are looking healthier not only interest rates but prices will also start to increase.  While I'm all for price appreciation, I'm not convinced that dragging out inventory is the answer.  Seems like it's just a band aid and 2 - 3 years down the road who knows where interest rates are going to be.  My guess is the shadow inventory will start creeping back into the market in Spring.

Oct 05, 2010 09:44 AM
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Charles -- This is starting to remind me of a wound that won't heal.

Oct 05, 2010 12:56 PM
Keith Lawrence
Christie's International - Mahwah, NJ
ABR, SFR

Thank you for the post.  With the halt of the foreclosure short sales will be on the rise.

Oct 06, 2010 01:07 AM
Kenny Salame
All Western Mortgage Broker # 14210 - Las Vegas, NV
NMLS ID 313873

Charles great post but why is there only 23 states that this new policy will affect?

Oct 06, 2010 02:26 AM
Anonymous
Gail Travers - RE/MAX

Hi Charles.  Thank you for the lucid explanation of the noticeable drop in bank-owned properties, currently on the market in many areas.  Of course, there will always be those who will see this measured release as a positive and those who won't.  Personally, I believe it's far easier to manage a slow leak than a dam failure and a lot fewer people will drown, as a result.

Oct 06, 2010 04:37 AM
#59
Dave Halpern
Dave Halpern Real Estate Agent, Inc., Louisville, KY (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Banks should expedite short sales so they can avoid the title problems associated with their flawed paperwork.

Oct 07, 2010 08:17 PM
Tony and Suzanne Marriott, Associate Brokers
Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ
Haven Express @ Keller Williams Arizona Realty

Now this counts as excellent news for those of us doing short sales!  Not so sure how this will be received by the agents who specialize in property management and lending money to the banks...I mean in listing and selling REOs!

Oct 09, 2010 11:24 AM
Patti Ann Kasper
EXIT REALTY NEXUS - Blaine, MN
Blaine & North Metro Minneapolis St Paul Real Esta

Thanks for the information. And althought Minnesota is not one of the 23 judicial foreclosure states, we will be impacted by the "extended review" of all Bank of America foreclosures in all 50 states. For information on how this affects Minnesota, check out my newest blog post: MERS: Who moved my mortgage? Foreclosures halted in 23 states.

Oct 12, 2010 03:03 AM