A couple of weeks ago, federal government and Attorneys General in 50 states reached a settlement with major banks called the National Mortgage Settlement. I’m sure you have read and seen from the newspapers and on tv about the current state of affairs in the real estate market and you have formed an opinion. By the time, we’re finished with this article and you watch the videos below, I promise you that you will have a better understanding of exactly how the distressed homes will affect the real estate market.
I've put together a webinar to take you through step by step what Shadow Inventory is, what the National Mortgage Settlement is and how it will affect our market. To make it easier for my readers, I'm breaking the webinar into 3 parts and providing a quick overview below.
What is Shadow Inventory?
Let's start out with the definition of Shadow Inventory. It breaks down into 3 components:
- Houses that are 90 days delinquent on their mortgage. These are homes that are not in the foreclosure process yet. The homeowners are just 3 months behind on their payments. The reason this is considered shadow inventory is that statistics show us that over 97% of people that fall 3 months behind will never catch up with their mortgage payment. They wind up as a distressed property. There is a thing called the cure rate. Cure rate represents the number of people that fall 90 days behind on their home mortgage and are able to catch up to current. The cure rate, right now in United States, is a little less than 3%. What this means is that 97% of the people will not catch up and will wind up in some sort of distressed property situation.
- The 2nd category are homes that are already in the foreclosure process. Notice of Default has been filed, but the banks did not foreclose on these homeowners yet.
- And the 3rd category is homes already foreclosed on and owned by the bank, but are not on the market yet.
Each and every state has "Shadow Inventory". California's volume is not as great as other states because the banks have been clearing through the existing inventory faster than in other places around the country.
Foreclosure Process and Robo Signing Fiasco
The foreclosure process, overall, is pretty simple:
People go 90 days late on their mortgage, then they go into a foreclosure process. Once the foreclosure process is finished, the banks get ownership of the house and once the property is cleaned up, the banks release it on the market as an REO (Real Estate Owned)
Different states have different ways to foreclose. California is considered a non-judicial state meaning that the banks do not have to take the foreclosure through the courts and usually the process is pretty fast.
However, because of the Robo signing and the mess that occurred when the mortgage companies didn't really finish their paperwork right, the Attorneys General in all 50 states started to push back on the banks and insist that the banks complete the paperwork correctly or they will be penalized.
So... between the foreclosure process and the actual foreclosure when the banks were able to take the property back, there was a line drawn by each local state saying that the banks could not take the house back before they finished filling out the paperwork correctly.
Completed Foreclosures Nationwide
Let's take a look at the 4th quarter of 2009 to the 3rd quarter of 2010 above. What we can see is that in those quarters, and by the way these are not cumulative numbers, but are individual to each quarter, we can see that the number of houses that the banks were taking back, actually foreclosing on, were growing dramatically.
Then the robo signing scandal was announced - banks were not processing the paperwork right and were just signing off on it. That's when the Attorneys General stepped in and said that they were going to penalize banks for not foreclosing correctly. So the banks simply stopped or slowed down the foreclosure process until they found out what they were allowed to do.
And, the impact it had on the number of completed foreclosures in this country is that they dropped like a rock in the 4th quarter of 2010.
This is why you might see some headlines in the papers saying that foreclosures are down 3+% from 2 years ago. In some papers, they're spinning this as a very positive thing saying that we're finished with the foreclosure challenge and though that's accurate that the numbers are down, it's not true that we're finished with the foreclosure challenge. And, here's why...
Foreclosures in Process Nationwide
The foreclosures that are actually in process where the homeowners are behind 3 months or more on their payments are actually increasing steadily for the same time period.
The number of homes going into the foreclosure process continues to increase, but the number of completed foreclosures dropped off dramatically.
And, that's what's causing the back log and is a huge component of the "Shadow Inventory" that you keep hearing about. Tomorrow, I'll post Part 2 that will explain the National Mortgage Settlement and how it provides the banks with a road map in releasing all this inventory.
READ MORE: Part 2 - National Mortgage Settlement Affects Pasadena Home Inventory
Irina Netchaev is a Top Realtor and the founder and President of Pasadena Views Real Estate Team™. She is available to assist you in all of your Real Estate transactions. Email or call her today at (626)629-8439.
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