Shadow Inventory Confusion Reigns

Shadow Inventory Confusion Reigns

There is currently no shadow inventory of bank-owned (REO) properties. What’s more, a surge in REO properties is not likely anytime soon.

If this sounds familiar, it’s because I’ve said it before, in this post and this post and other places. However, it still seems to be news (see the recent WSJ article) and despite the fact that the most recent CA Foreclosure Report from runs the numbers, some still insist the shadow is there.

First, let’s be clear about what shadow inventory is. These are homes that the bank has already foreclosed on, but which, for no apparent reason, aren’t listed. The implication is that banks are holding REO properties back from the market to restrict supply and prop up prices. This actually seemed like a distinct possibility a year ago when the banks were clearly holding more inventory than they were listing. But that is no longer the case. In the past year, they have resold far more than they’ve taken back, eliminating any possibility that a shadow remains.

Some observers, who earlier this year warned that this shadow inventory would deluge the market with REO listings, have now redefined shadow inventory to include properties that should be foreclosed on. They continue with misguided warnings of a deluge of REO listings any moment now.

Not so. These properties are not lurking in the shadows at all. We know exactly which properties are in trouble and where they are in the process. Using you can easily see every potential REO listing, from Notice of Default to Notice of Trustee Sale, for the next six to nine months. In addition, even if banks reversed course and started foreclosing aggressively today, it would be months before we saw those listings as it takes time to evict the homeowner, clean up and list the property.

What’s more, they’re not going anywhere. These properties aren’t grinding through the pipeline to foreclosure and into the shadow inventory. They’re not moving at all because we as a society lack the political will to foreclose. Because the national focus is targeted on keeping homeowners in their homes, the drain is bigger than the spigot – REO properties are selling faster than distressed properties are being foreclosed on.

As a result, the pendulum has swung to the other side. Instead of a glut of properties hitting the market, as so many have warned, we currently don’t have enough inventory for those who want to buy homes, and homeowners are still in trouble because the so-called solutions (foreclosure moratoriums, loan modification, refinancing) don’t fix the real problem, which is negative equity.

No more conspiracy theories. We need to abandon the obsession with shadow inventory, which distracts us from the national discussion we should be having. With the current lack of inventory, its time to force banks to clean up their balance sheets by dealing head-on with the trillions in negative equity that remains, either though loan modifications that reduce principal balances to near current value, short sale, or, if necessary foreclosure. These are the only solutions that deal with the core problem of negative equity. It’s time for “extend and pretend” to end.

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