In the last twelve months, a lot of forecasting and reporting has been done about the so-called “shadow inventory” by analysts and researchers as well respected as Standard and Poor, Amherst Securities Group and the National Association of Realtors economic research group. The more or less accepted definition of shadow inventory is that share of mortgaged real estate in which either the owner is in arrears on the mortgage payment; the homeowner owes more on the property than it is worth and is attempting a short-sale; the property is in pre-foreclosure or foreclosure proceeding; the property has been foreclosed on but is not on the market; or the property has been foreclosed on and is being actively marketed.
This forecasting of shadow inventory involves estimating the size of the inventory; the time frames it takes for shadow inventory to mutate through its various stages, from the initial borrower default to the sale of the REO property following foreclosure; and the impact the inventory may have on banks, investors, mortgages, and the housing industry.
What troubles me most about the “shadow inventory” discussion is that there is very little consideration given the consumer, and no mention of what this shadow inventory might mean to the potential homebuyer. Specifically, there is no discussion of the Right — yes I do mean right with a capital R — a homebuyer has to know about what shadow inventory might be lurking within a given radius from the home he or she is considering buying. Granted, through the MLS, it is relatively easy for buyers or their agents to find out how many homes are potential short sales and how many homes are bank-owned and on the market. It may be a little harder — but nonetheless possible — to search the public records to identify how many homes are in foreclosure proceeding or are bank-owned. What remains in the “shadows”, and what in my opinion is the true “shadow inventory”, is how many loans in any given geography are non-performing.
This “unknown” troubles me even more when I look at the numbers most of the forecasters and researchers seem to agree on: there are roughly 7 million homes that fit in one or more of the shadow inventory definition. Out of those, only 31.23% are actually in foreclosure or, for my purpose of informing consumers, identifiable through public records; a whooping 28.65% are 90+ days in arrears, which gives them a 99% likelihood of being foreclosed; 12.4% are 60 days in arrears and have a 95% chance of being foreclosed; and 27.18% are 30 days in arrears and have a 72% chance of becoming a foreclosure. This means that roughly 69% of the 7 million are in default and that out of those, 41% have 95% or greater chance of becoming an REO. And none of these properties can be identified to inform and protect the potential homebuyer.
Considering that the disclosure of adverse material facts is possibly the greatest legal obligation sellers and Realtors owe buyers, I find it odd that lenders are exempt from providing the data that would allow buyers to make a complete assessment of the value of the property they are considering. Clearly, there is a material difference between buying a property on a street where 0.5% of the homes are in arrears versus one where the number climbs to 5% or another yet with defaults as high as 50%. The materiality of this information is even greater in condominium complexes, where delinquent borrowers may still be paying pay their HOA fees in order to obfuscate the fact that there are foreclosure candidate.
If regulators — states and the federal government — are as concerned about consumer protection as they claim to be, then I’d like to suggest that they subject lenders to at least the same standards as Realtors and sellers. Lenders are, after all, equity owners in any neighborhood in which they choose to lend, and sheltering them from the adverse material fact disclosure requirement imposed on everyone else is favoring their welfare over that of the consumer. Regulators and legislators, elected officials or not, could, for example, enact rules or legislation requiring public notice of any loan that is more than, let’s say, 120 days late. Based on the statistics, those loans are not recoverable and once the lender forecloses and liquidates the properties, they will more certainly affect property values in the neighborhood. And that is something buyers have the Right to know, and mortgage holders should have an obligation to disclose.
