"Foreclosing" on 2009, Part II: Shadow Inventory
by Selma Lewis, Research Economist
As the discussion in the In Focus feature of February's Real Estate Insights suggests, estimating shadow inventory is a very complicated task. In this month's In Focus column, we present some data and other information that may help simplify the issue and give REALTORS® and others a clearer understanding of shadow inventory.
Estimates of shadow inventory have ranged anywhere between 1.7 million properties to 7 million. The reason for this wide range of estimates stems largely from varying perceptions of what exactly shadow inventory means. Those whose definition of shadow inventory refers to seriously delinquent loans (90 or more days late) and properties in the process of foreclosure but excluding distressed properties already listed on the market and loans in the mortgage modification process, arrive at more modest estimates. In contrast, those looking at every loan that has recorded at least one missed payment, do not account for properties already listed or those being modified, and do not assume that some of the loans currently delinquent will cure, naturally arrive at much larger estimates of the shadow inventory. Nevertheless, to provide some numbers which illuminate the size of the problem loan pool, NAR analysts used 4th quarter 2009 data from the Mortgage Bankers Association (MBA) and Lender Processing Services (LPS).
Since MBA data represents about 80 percent of all "first-lien" residential mortgage loans outstanding in the United States, MBA's numbers were extrapolated to account for all outstanding "first-lien" residential mortgages. The first table (Table 1: Mortgages in Delinquency) summarizes MBA Delinquency Survey figures and shows that at the end of the fourth quarter last year 4.58 percent of residential loans were already in the foreclosure inventory, 5.09 percent of the loans were 90 days or more late (in terms of payments on mortgages), 1.73 percent were 60-90 days late, and 3.63 percent were 30-60 days late. The fourth column of the table presents average "roll rates" - that is, the percentage of loans that will "roll" into the next stage of the foreclosure process - as estimated by LPS. For example, on average, 22.5 percent of the loans that were 30 days late will roll into being 60 days late. Under the "Current category", an average of 1.5 percent of all loans will become 30 days late. The last column of the table presents the recent four-month average roll rate - which differs slightly from the average percentage seen from 2005 to present. The interesting trend suggested by the roll rates is that while many more mortgages are rolling further into delinquency status, a smaller share is ultimately ending in foreclosure. These trends reflect the increasing pressure for loan modification and on lenders to stall foreclosures and try to keep homeowners in their homes.
So, based on these figures, let's look at Table 2, "Estimates of Shadow Inventory." The first row data reflects the number of loans currently in the foreclosure inventory as well as the share of loans that are 60 or more days late and are anticipated to have entered foreclosure inventory since the fourth quarter of 2009 (based on LPS roll rates). From those approximately 3.2 million loans, we extracted the number of loans that are already visible in the market inventory. According to NAR's REALTORS® Confidence Index (RCI), about 24 percent of current existing-home sales are distressed properties. (see below for more information) We have also extracted 75 percent of the loans that were under the HAMP modification program as of January 2009. (Experts suggest that about 25 percent of HAMP modifications will re-default.) Finally, we added 770,175 lender-owned properties, or REOs, that are currently owned by banks but are believed not have been released on the market. The February 2010 issue of the LPS Mortgage Monitor report estimated there are just over 1 million REO properties; 25 percent of those are already assumed to be on the market. Current shadow inventory is thus estimated at around 2.49 million units.
The estimate of further foreclosures by the end of 2010 is projected at about 300,000 additional properties. This is assuming no further significant deterioration in the housing market, roll rates, and the economy. However, conditional on all the qualifications already discussed, foreclosure numbers can still vary significantly. It is still difficult to tell how many of the homes with loans modified under HAMP will be saved from ultimate foreclosure. Pressure is growing on U.S. banks and other lenders to prevent further foreclosures and to ease terms for homeowners on their home-equity loans and other second-lien mortgages. Under the new Home Affordable Foreclosure Alternatives Program scheduled to begin in April, the following financial incentives will be provided: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders. This program would not only induce new short sales but would also speed short sales through the process. But, similar to the HAMP program, the success of this program is still difficult to predict.
Another looming issue are the "Option ARMs" resets anticipated to occur between the second half of 2010 and 2012. While many of these troubled loans have already defaulted, the future of many will depend on the willingness of lenders to write down the loan balances. Unfortunately, however, the largest share of Option ARMs - about 60 percent - is concentrated in several areas in the state of California. Indeed, they are in the same areas that have already been hit hard by drastically falling home values. Other areas with high concentration of Option ARMs are those states also reporting the highest foreclosure rates: Florida, Nevada, and Arizona.
Another problematical component are current REOs held by banks and at what rate will banks dispose of those properties. Experts state that many of the REOs in high-demand areas (such as California) are being "bundled" in hundreds and sold to investors. However, these transactions are not reflected in NAR's existing-home sales data or inventory figures (homes on the market) and thus are difficult to estimate. As NAR's Realtor Confidence Index (RCI) suggests, the range of distressed sales by month (foreclosure sales and short sales as a percent of all sales) varies across markets. Still, it appears that REOs and short sales in the hardest hit areas are being released for sale and are not being 'hogged' as some news articles have suggested.
The national rate of distressed sales has been falling - from a peak of 49 percent in the first quarter of 2009 to 38 percent in January 2010. As of November of 2009, prior to the foreclosure moratoria imposed by many states, the share of distressed sales ranged from 13 percent in New York to 66 percent in Michigan. While distressed sales include both REOs and short sales, foreclosures accounted for a higher portion in the high-foreclosure states: 66 percent in Michigan, 60 percent in Arizona, and 50 percent in California and Florida. This trend shows that foreclosure inventory is not only being sought by buyers who are seeking steeply discounted REO inventory, but it is sought after even in the worst hit foreclosure markets. Finally, according to NAR's RCI, foreclosed properties are mostly selling at about a 16 percent discount, while short sales are discounting about 13 percent. These discounts have also shown to be slowly decreasing since the first quarter of 2009.
In a nutshell, since the foreclosure crisis began, experts have been trying to draw some generalizations based on each month's data. But the truth remains that there are too many moving parts that are continually changing which make it very difficult to know for certain what will happen to foreclosures in 2010. The current facts? The pool of seriously delinquent loans is swelling, and the number of days between delinquency and foreclosure has continuously increased as banks, state governments, and the federal government, are trying different programs to keep people in their homes. One in four homeowners owe more on their homes than those homes are worth, and those homeowners are concentrated in California, Florida, Nevada, and Arizona. Banks are reluctant to write down loan balances. REO sales as a share of total home sales will remain at current or even higher levels in some areas for the next couple of years (REO sales as a share of total home sales are not however expected to reach the peak second quarter of 2009 levels). Investors and home buyers are seizing REOs, particularly those in lower price tiers. Finally, despite the high shares of REO sales, home prices in some of the worst hit markets are stabilizing.
* For more information, visit the Mortgage Bankers Association of America web site at www.mbaa.org.
RealtyTrac's web site address is www.realtytrac.com. For county level 90+ days mortgage delinquency
rates, please visit: http://data.newyorkfed.org/creditconditions/#US_expMay2011_sp.
