Shadow Inventory On The Rise After 2012 Foreclosure Legislation

A new report issued today by RealtyTrac says that the U.S. foreclosure inventory has increased by about 12 percent since May 2012 when it hit a five-year low of 1.3 million properties.  Today that inventory stands at about 1.5 million and is up 9 percent form the first quarter of 2012.  The foreclosure inventory consists of homes actively in the foreclosure process and bank-owned homes or REO.  

RealtyTrac says it was the finalization of the National Mortgage Settlement in April 2012 that triggered the growth of the inventory which is driven by a 59 percent jump in properties in some stage of foreclosure.  The inventory is down from a peak of 2.2 million properties in December 2010.

"Delinquent loans that fell into a deep sleep after the robo-signing controversy in late 2010 are gradually coming out of hibernation following the finalization of the national mortgage settlement in April 2012," said Daren Blomquist, vice president at RealtyTrac. "The settlement provided some closure regarding accepted foreclosure processing practices, and as a result lenders have been reviving more of these delinquent loans and pushing them into foreclosure over the past 12 months, particularly in states where a lengthy court process has resulted in a bigger backlog of non-performing loans still in snooze mode."

The cumulative estimated market value of homes in foreclosure or bank owned was $200 billion as of the first quarter of 2013, up 14 percent from the $175 billion cumulative estimated value in the first quarter of 2012.

Increases in inventory were by no means uniform.  Twenty-six states posted annual increases in the foreclosure inventory while those in 24 states and the District of Colombia fell in the first quarter on an annual basis in the first quarter.  As RealtyTrac points out, not surprisingly the different behavior was highly correlated to the type of foreclosure process used in the state.   Nineteen of the 26 states in which the inventory grew are judicial process states which have been more susceptible to backlogs of "shadow" foreclosure inventory being built up over the past few years due to more lengthy foreclosure timelines.

RealtyTrac cross-referenced foreclosure data with post office data and found that 35 percent of the properties in the process of foreclosure nationally were vacant.  Florida had by far the largest number with 90,000 properties flagged as vacant followed by Illinois with 28,821 and Ohio with 17,367.  By percentage, in six states these so called "zombie foreclosures" constituted half or more of the shadow inventory.

RealtyTrac said many of these are properties where owners have moved in anticipation of a foreclosure that has not occurred and may not realize they remain responsible for maintenance and property taxes.

The shrinking number of homes in some state of foreclosure is impacting national homes sales - this listed inventory was down 43 percent in the first quarter compared to a year earlier - but in some states this listed inventory increased including New York, New Jersey, and Florida.  In those three states, listed pre-foreclosure inventory accounted for the entire increase in overall listed foreclosures, while listed bank-owned properties decreased annually in all three states.  Nationwide there was a 12 percent year-over-year increase in this shadow inventory, driven by a 23 percent increase in the pre-foreclosure segment. Meanwhile unlisted bank-owned properties decreased 2 percent from a year ago.

The shadow inventory of homes that have started the foreclosure process but are not yet been listed for sale may provide hope in some markets hungry for more inventory as many will be listed as short sales or go through foreclosure and be listed for sale as REO over the next six to 18 months.

RealtyTrac analyzed the foreclosing entity listed on foreclosure documents - from initial default notice to the foreclosure deed transferring a property back to the beneficiary - and found that the government-backed entities Fannie Mae, Freddie Mac and FHA/HUD accounted for the biggest portion of foreclosure inventory, with a combined 12 percent of the national total, followed by Bank of America with 11 percent, Wells Fargo with 10 percent and Chase with 7 percent.  Inventory with Chase listed as the foreclosing entity increased 58 percent from a year ago, the fifth-biggest increase among the top 20 institutions in terms of total foreclosure inventory followed by Nationstar Mortgage (101 percent) and Green Tree Servicing (89 percent).

More than two-thirds of the properties actively in the foreclosure process or bank owned as of the first quarter of 2013 were built after 1960, about equally split between homes that were built between 1960 and 1990, and those built in 1990 or later.

More than 60 percent of foreclosure inventory in the first quarter of 2013 was comprised of properties with loan amounts under $200,000, while homes with outstanding loans between $200,000 to $400,000 represented an additional 30 percent of all foreclosure inventory.  Properties on either end of the debt spectrum saw the biggest annual increases; properties with loan balances over $5 million increased by 126 percent while those with loan amounts under $50,000 increased by 62 percent.