Shadow Inventory and the Foreclosure Timeline in Nevada

Shadow Inventory and the Foreclosure Timeline in Nevada

Despite all the press it gets, shadow inventory in the real estate market has never, to my knowledge, been officially defined. Is it the homes that the banks have foreclosed upon and not listed for sale? The properties that have fallen into default but not yet hit the courthouse steps? Where do short sales fit in? How about the normal, every-day sellers that would like to sell their houses and move, but haven't tried because a)they don't believe they would be approved for a short sale, or b)they can't bring themselves to take the loss, even if it is a paper loss from an unrealistic value? Back in the good old days, we Americans used to move about every seven years on average. Is that pent-up selling demand part of the shadow inventory?

Whatever you choose to include, it is pretty clear that this backlog of inventory must make its way through the real estate pipeline, like a giant dinner bulge through a snake, before we can regain some sense of normality.

A quick review of the timeline for foreclosures in Nevada may provide some insight. For our purposes, lets assume that Harry and Hannah Homeowner have fallen on hard times and cannot go on making the payments to their lender. There are various sidetracks that they can take throughout this process (short sale, deed in lieu, bankruptcy filing, loan modification, etc.) that we shall ignore for simplicity.

Month One

1st - Payment is due on the Homeowners' first (and only) mortgage

16th - Payment is late; late fees apply. If they pay the mortgage and late fees before the end of the month, likely no credit hit will ensue

Month Two

1st - Payment is now 30 days late; the Homeowners are delinquent and just received their first credit ding

Month Four

1st - Payments are now approx. 90 days behind. The Homeowners are "in default". A Notice of Default is filed by their lender with the Washoe County Recorder and sent to them by registered mail. At this point they have 30 days to pay all of their back payments and fees and remove the default; at the end of that time, the acceleration clause in their mortgage kicks in making the full balance plus late fees due and payable. In Nevada, the Homeowners also have the right to request mediation with their lender. A mediator will be appointed upon their request, with the cost split between the Homeowners and their lender. This right will be brought to their attention in the  Notice of Default paperwork that they receive, along with an application to pursue it.

Month Five - The Homeowners have either waived mediation/were not eligible/did not respond/or mediation was completed without relief for them. A Certificate of Mediation is filed, and the foreclosure process resumes.

Month Seven - The Homeowners are now six months delinquent. A Notice of Trustee's Sale is filed specifying the date, time, and place of the auction sale of their property. This notice is published in a paper of general circulation for three consecutive weeks, with the sale scheduled for the fourth week. The sale can be postponed three times, then another notice is required.

Month Eight - A foreclosure sale takes place on the courthouse steps. The home is either sold to a third party, or else is "sold" back to the lender for the amount of their opening bid, which may be the total of what was owed or some lesser amount that they specify.

Subsequently - If the Homeowners are still living in the home, they will either be offered cash for keys to move without damage to the property, or else formally evicted and removed by the police.

So, with that background, where do we stand in Northern Nevada as far as "shadow inventory" at the various time points described? Here are the stats for Washoe County (population 417,379) as of this date (Labor Day, 9/5/11):

Notices of Default: 1868

Notices of Trustee's Sale: 656

REO (ForeclosureRadar): 914

REO listed in MLS: 923

Less than 90 d late, want to sell but not listed, etc: ????

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Picture credits: Garter snake eating a toad by The_Gut, Shadow houses by D'Arcy Norman, both via Flickr Creative Commons License