Life in the shadows...

From a recent report on RIS Media – “CoreLogic, a leading residential property information, analytics and services provider, reported recently that the overall shadow inventory is down 28 percent from its peak in January 2010, when it reached 3 million homes. Current residential shadow inventory as of January 2013 was at 2.2 million units, representing a supply of nine months. This figure represents an 18-percent drop from January 2012, when shadow inventory stood at 2.6 million units.” To read the entire story on RIS Media, click here.

“Shadow Inventory” is a real estate euphemism for distressed homes – homes that are in some stage of the foreclosure process. A distresses home may be one for which the homeowner has missed a payment and a warning letter or default letter has been sent or it could be one that the mortgage company has already started the foreclosure process upon. The property is not yet listed for sale, so it does not show up on the active inventory of available homes. I suppose that we could have just as easily called this the “Limbo Inventory”, since the properties are in a state of limbo. There is, however, little sense of humor about this whole topic.

Some of this shadow inventory built up when the banks paused to reassess their procedures after the robo-signing law suits and the revelations about missing mortgage paperwork. The 2.2 million units at the end of January represents about a nine month supply if it were all on the market right now. That would be a welcome addition, since we are down way below that figure everywhere and the tight inventory is causing frustration for would-be buyers. Of course, sellers are happy that it’s not on the market, since the tight inventory is driving up prices.

Some of that shadow inventory could end up reaching the market as short-sale listings and avoid the whole foreclosure process. Some may be delayed indefinitely. There is no requirement that banks carry out the foreclosure process in a timely manner. Just going through the Federally mandated processes of offering loan modifications or other alternatives to foreclosure can take several months. There are many cases of people living in houses that are in or due for foreclosure for years without ever paying.

Even after foreclosure, the ex-owners have 6 months that they can live in the house without paying and then the bank must still go through an evict process to get them out at the end, if they haven’t left voluntarily. There have also been cases of “squatters” occupying foreclosed homes that had been abandoned. The banks must go through an eviction process to get them out, too; even though they have no real claim to the property.

So, if you've been wondering about that empty and seemingly abandoned house in your neighborhood, perhaps it is a member of this shadow inventory. It eventually will be put on the market and sold, but by then it will likely need quite a few repairs or other maintenance. It is very frustrating for Home Owners Associations (HOA) because, not only are dues not being paid to the HOA; but, the place gets looking run down and detracts from neighborhood values. Banks seldom care about really keeping the place up when it’s in limbo. Some HOA’s have slapped liens on the homes to pay for needed services like lawn mowing  or repairs of dangerous situations. The banks often refuse to pay off those liens when the place is sold, leaving it in limbo again.