Shadow inventory is getting better, not worse
Another month, another 200,000 foreclosure filings, according to the February foreclosure report from RealtyTrac. That's down slightly compared to last year, but could speed up again now that several big banks and state attorneys general have reached a settlement in a federal court case, clearing the way for a faster foreclosure process in many places.
Foreclosed property transactions and short sales now make up roughly one-third of all home sales, according to the National Association of Realtors (NAR). Experts say homeowners should prepare for several more years of difficulty, as millions of homes are still working their way through the foreclosure process and millions more are at risk.
Economists call these troubled loans "shadow inventory" because most aren't included in the current tally of homes for sale. There are almost 4 million of them, according to data from the Mortgage Bankers Association (MBA).
It's getting better, not worse
"There is going to be this overhang of distressed properties for years," says Michael Fratantoni, vice president of single-family research and policy development for the MBA.
But before you give up hope, there is some good news: The problem is slowly getting better, not worse. There are now roughly 3.9 million home loans in foreclosure or more than 90 days late, according to the MBA. That compares to 4.8 million such loans in 2009. Furthermore, economists expect the number of problem loans to continue to steadily shrink.
Most homeowners holding on, making payments
Nationwide, roughly 11 million homes are now worth less than the amount of their mortgage, according to the research firm CoreLogic. But so far, many homeowners are hanging on. The percentage of home loans more than one month but less than two months late in their payments is now back down to normal levels seen before the recession--about 3.5 percent, according to Fratantoni.
Since the housing crash, new home loans have typically had very tough underwriting standards. Lenders now turn down 5 percent to 10 percent of applicants with very strong credit scores over 800, according to Jed Smith, manager director of quantitative research for the NAR.
"Banks are very, very risk averse," says Smith, making these newer loans more resilient against foreclosure. Also, the overall economy is strengthening, meaning fewer people are losing their jobs and forced into foreclosure for lack of income.
The shadow inventory
Most of the 4 million loans in foreclosure or serious delinquency have been in trouble for a long time. Take California: The average homeowner who lost a home to foreclosure in 2011 had fallen $42,000 behind in their payments, according to RealtyTrac. To rack up a total like that, the homeowner probably stopped paying their mortgage in 2008 or 2009, says RealtyTrac vice president Daren Blomquist.
Banks used to start foreclosure proceedings almost immediately after three months. There are now about 1.7 million home loans that are more than 90 days late but haven't begun the foreclosure process, according to the MBA. That may sound like a lot, but it's down from a peak of 2.5 million in early 2010. These loans are hanging in a kind of mortgage limbo.
The slow crawl towards foreclosure
Bureaucratic delays have slowed down the foreclosure process. For example, for most of 2010, banks took more than 300,000 foreclosure actions a month, according to RealtyTrac. That stopped in October 2010, when the "robo-signing" scandal came to light. Throughout the high-profile lawsuits that followed, banks completed more than 200,000 foreclosure actions every month--still a lot, but much less than the monthly average in 2010.
The foreclosure process has typically been slow in the 26 states that have a judicial foreclosure process. However, with many of the legal questions surrounding such foreclosures now resolved, the number of foreclosure actions is spiking in those states. Such states include Pennsylvania, where foreclosure filings are up 45 percent, Florida, where filings are up 40 percent, and Illinois, where filings are up 39 percent.
However, some mortgage lenders continue to be reluctant to move loans into foreclosure, because they don't want to seize homes faster than they can sell them. "The lenders do not want to tank the market again," says Blomquist.
At the current rate, banks are selling about 1.2 million foreclosed homes a year, plus another 100,000 in short sales. "That's about as fast as this system can go," says Fratantoni. At that rate, it will take about three more years to foreclose on all 4 million troubled mortgages and sell the homes.
Research before you buy
Of course, if the economy continues to pick up, the housing market could heal more quickly--although in the short term, stronger demand could simply allow banks to speed up foreclosure activities.
If you are thinking about buying a home and you're curious about what these numbers mean to you, do yourself a favor and visit the "Stats & Trends" section of the RealtyTrac website. It shows the concentration of recent foreclosure actions in local housing markets, sometimes down to the ZIP code. Keep in mind, however, the data does not include the troubled loans of the shadow inventory that are not yet in foreclosure.