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Posted by on Aug 3, 2010 in REO Counts, Shadow Inventory, Thinking of Buying? | 16 comments | Print Print

More on Shadow Inventory

Readers regularly send in articles for us to examine here – keep them coming!

Tom sent in an article from that was also referenced in a mortgage blogger’s post which Gordon sent in, looking for thoughts – thanks to the both of you! 

Both articles used this chart from RealtyTrac:


At first glance it appears that there must be a wide-spread conspiracy between banks to withhold their foreclosed properties from the open market, in order save the world from total collapse.  When you read the two articles linked above, that’s the impression the authors got from the chart.


1.  Two years ago I paid to advertise on RealtyTrac, hoping to cause their members to utilize my services.  As inquiries came in about properties marked as being in foreclosure on the RealtyTrac website, I noticed that there were many houses which had sold 6+ months prior, and others that had multiple entries. 

When asked, a RealtyTrac employee confirmed that they receive their data from multiple sources, and they don’t screen it for accuracy.  I quit advertising, and haven’t trusted their data since.

2.   Readers gravitate to the sky-is-falling, tabloid-style soundbites. People think that there are conspiracies in play, and they want the dirt on them.

Yet authors, bloggers, etc. are struggling to get the truth on what’s really happening with foreclosures, and the real estate market in general.  As a result, stories are written based on questionable data or theories/hunches hoping to appeal to the readers’ desires, but who knows how close they are?

3.  San Diego is not on this chart, and I don’t know anything about the markets that are mentioned.  But I did research on our bank-owned properties, based on the owners listed on the tax rolls for SFR and condo properties in San Diego County:

SD REO Prop Owner # of REOs
Fannie Mae 899
Freddie Mac 334
Wells Fargo 267
JPM Chase 118
BofA 102
IndyMac 59

We know that California is a tenant-friendly state with regards to eviction, so I’m going to cut the banks some slack during the first three months of REO ownership.  Once they get the occupants out, it still takes time to assess the value, complete repairs, and general processing.

Let’s look at REOs owned since before May, 2010 that aren’t on the open market – if there are a bulk of those, then the conspiracy would be clearer.

A review of the individual properties owned by Bank of America revealed the following:

1. Nine of the 102 were owned in trust for an individual, not a foreclosure – leaving 93 REOs.

2. Twenty-five of the properties were former Barratt homes that BofA is in the process of selling.

3. That leaves only 68 individual BofA REOs in the county.  Of those, only seven had been foreclosed prior to May, 2010, and how many of those were probably tenant-occupied?  To me, it doesn’t look like BofA is trying to withhold properties.

How about Fannie Mae?

I checked the first 50 properties from the alphabetical list of Fannie REOs that were foreclosed on prior to May, 2010.  Forty of the fifty had made it to the open market.  Not as proficient as BofA, but they are probably less nimble about the evictions too.

It makes for a sexy story to say that the banks have this huge shadow inventory of homes waiting off-market, but until somebody besides RealtyTrac verifies it without a doubt, I’m going to be skeptical, at least with bank-owned properties in San Diego County.


  1. My instinct is that the ‘shadow’ is not post foreclosure as they pretty much want that stuff off the books as its a money pit from the day they foreclose.

    The shadow is in the nebulous pre-foreclosure stage where its all very subjective. perm/trial Loan mods, short sale games, NOD for months on end, postponements, cancellations, redefaults, etc. Seems like all these shadows are much more difficult to track but it is where the games are being played.


  2. Agreed, and it’s another story.

    My point is to at least question the ‘banks are holding back properties’ idea that still swirls around.

    Read the two linked articles, and you would think that the sky is falling – all based on data that is very suspect.


  3. I’m with clearfund…

    Until all the free-renters are forced out. We really have no way to know how much shadow inventory is out there.

    No bank is going to lead a trail of bread crumbs linking all the info that shows how they’re scamming the market.


  4. It’s been ages since I checked in on RealtyTrac for the same reasons – but as I recall they also listed 2nd mortgage NOD’s as an individual foreclosure. So many homes are counted twice on that alone.

    I don’t recall if I found this article on your site or elsewhere, but there’s a story of a couple buying a 2nd note accidently because the 1st and 2nd lender were one in the same and both recorded on the same date, so they mistook it as a typo and bought the 2nd note at auction – doh.

    Either way it would be nice to get real data – not Realtytrac junk.


  5. Thanks very much for that Jim.

    The shadow inventory is indeed a “sexy” story.
    And it was RealtyTrac that broke it back in April 2009. Your work gives some perspective.

    It boggles my mind though that the number of foreclosures that really did happen last year were turned around to flippers and regular buyers. I mean, I guess they did, but it doesn’t seem like they did.

    So then, in estimating supply and demand in the RRE market today we’re left with guessing how many potential foreclosures might, maybe, be allowed to happen and how many sellers that really want to sell will throw in the towel and price their place to sell vs. how many people have the cash and desire to buy properties that are priced right and all the poor schmucks that are living with their parents and hating it and wanting and needing to buy a house if only they could get their income and their credit rating back to where it needs to be.

    In other words figuring supply and demand for RRE is about as easy and straightforward as figuring supply and demand for oil. Oh joy!


  6. Jim,

    I have seen some of these reports that the banks are withholding inventory as well. Shadow inventory is NOT inventory the banks own. They are not hiding the REO on their balance sheets.

    Shadow inventory is the huge number of delinquent loans upon which they have not begun foreclosure proceedings. There IS and enormous amount of that toxic waste lingering on their balance sheets, and it is the cleanup of that mess that will bring more inventory to the market.


  7. This has always been my position-there is no significant shadow inventory, if you define the term to only include bank owned properties not on the market. If you define the term to include properties that the bank “should” have foreclosed on by now but hasn’t, then there is, in fact, a significant shadow inventory. But the exact status on those properties varies-lots of loan mods and short sales in process there.


  8. Oh, and if you think about it, the way the banks are doing it (delaying foreclosure but selling properties in a timely manner post-foreclosure) makes a hell of sense for the banks. First, there’s always a chance the home “owner” wins the lottery or something and gets current on his house (or, much more likely, gets a short sale or loan mod). Second, things like property taxes, routine maintenance, HOA fees, and the like are still the home “owner” responsibility until the bank actually forecloses, when all that and more becomes the bank’s problem. Third, if the banks think prices are going to rise, why not delay foreclosing? No holding costs to speak of, yet a higher dollar payout at the end.


  9. Geotpf,

    Fiduciary duty and contractual obligation ought to be why banks should move immediately on defaults, since the vast majority of loans are only serviced by the banks, but owned by securitized pools on whose behalf and in whose interest the banks are supposed to act. The pooling and servicing agreements require banks to move promptly against defaults, although some permit modifications of some kinds after default or when it is imminent. But with no one filing suit and enforcing the bondholders rights, all that gets forgotten.


  10. Fiduciary duty! ROFLMAO. Thanks,Sean,been a rough day and I needed that.


  11. agree with clearfund, the shadow is in the pre-foreclosure pool. at least in my neck of the woods, all of the REOs are placed on the market and sold within 1-3 months.

    the issue at hand is how do you count the shadow?

    properties within the pre-foreclosure pool certainly. but there’s also a larger pool of homes with many missed payments and no notice of default. and then there is an even larger pool of up-side-down owners that are holding on with the hope that with patience the market will come back and allow them to dump their properties. (these are the folks that flood the market with high asking prices once there is a couple of decent sales in the neighborhood).


  12. Sean-I believe the decision whether or not to foreclose is, in fact, up to the actual owner of the loan, which may or may not be the bank servicing it. This might explain why some properties with the same bank servicing the loans get foreclosed upon at different speeds-the bank may get different instructions from the different loan owners. The rest of my comments still applies no matter who actually owns the loans.


  13. I did a post back in 2009 to counteract a Dr Housing Bubble post which was blathering there was this monster supply of homes foreclosed on but not on the market:

    I actually did way more research for my local area than showed up in the post. I took a list of every foreclose APN and matched it up with APN’s from the MLS whose listing date was post foreclosure. It was a massive data set and came to the exact same conclusion you did with your data set. Outside of a bit of time for processing foreclosures (eviction, trash-out, BPO, repairs) almost every home was on the market in a short period of time.


  14. I agree with everyone here. Ever since they suspended mark-to-market on the toxic assets, those assets are not “toxic” anymore, atleast until they foreclose and try to sell it on the open market.

    The banks are magically “solvent” again because of this. If they foreclose en-masse, they will become insolvent again, since foreclosing is effectively “mark-to-market”. This could take years, thanks to our government.

    If someone who is looking has a long time-horizon, then they should wait as the market will drip-drip-drip down. If someone wants to buy something in the next year, best chance is to low-ball or try a short-sale and get a 2012-2013 price now. 🙂


  15. I live in a 279 home subdivision that is about 12 years old. I am on the HOA Board so know the circumstances of the homes. We have a home which recently was sold at auction which sat empty for 3 years. We have another home where the owners left believing the home was about to be foreclosed and, like the first owner, have found they are still liable for HOA assessments 2 years later and still no foreclosure.


  16. There is another classification of homes that should be considered as a component of the shadow inventory. That classification is homes in seirous long term default for which the final foreclosure is being intentionaly delayed.

    Another subtlety (which it seems most residential realtors don’t understand because they don’t understand bank / investment accounting) is slowing foreclosures and motivating banks and investors to relegate homes in default to the shadow inventory is the delay of the implementation of the Financial Accounting Standard Board’s implementation of mark-to-market accounting for some infrequently traded assets. (See the Wall Street Journal article titled, “Congress Helped Banks Defang Key Rule” June 3, 2009 by Susan Pulliam and Thomas McGinty. And see, mark-to-market accounting on Wikipedia)

    Completing a foreclosure would force the bank to reprice the asset (mortgage) or sell the property at true market value.

    It makes one wonder about the effect of mark-to-market repricing on bank balance sheets, and the true fractional reserves of banks that have significant mortgage holdings. It also makes one wonder how mis-stated the financials of other big mortgage investors (like pension funds) might be.

    The squatters in default are helping the banks and investors by preventing looting and vandalism. And, as long as they stay in the home the property taxes, homeowner fees and municipal assessments are (arguably) still their obligations. The mortgage lender isn’t the property owner until the foreclosure is complete.



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