MIAMI — Officially, there are 3.5 million homes for sale nationwide. But there are millions more lurking in the shadows — hidden neatly away on banks' balance sheets, stalled in foreclosure court proceedings or simply occupied by nonpaying owners as lenders wait months or years before taking action.
The housing market's ballooning shadow inventory — buoyed by a yearlong foreclosure slowdown — stands as the most menacing obstacle to the recovery of the residential real estate market.
Clustered mostly in hard-hit cities and states, there are more than 4.5 million homes either owned by lenders or headed for foreclosure. In Miami, for example, there are about 200,000 shadow homes, dwarfing the 30,000 properties that are listed on the active market. Even as prices in Miami have shown signs of stability this year, an impending wave of foreclosures threatens to keep real estate values deflated.
"A lot of people don't understand how much inventory is set to come on line in the next 18 to 24 months," said Jack McCabe, the CEO of McCabe Research & Consulting in Deerfield Beach, Fla. "When you compare what the Realtors show as inventory to what's out there, you realize we have a long way to go." A McClatchy analysis of four years of foreclosure data and thousands of property records found record-high levels of shadow inventory in several housing markets across the nation.
Though real estate trade groups routinely leave these shadow properties out of monthly reports, their influence on home values has grown sharply in recent years.
In the supply-and-demand-reliant real estate market, the national supply of homes is officially listed at about 3.5 million, or about nine months' worth; sales are on track to reach about 5 million this year. But once shadow inventory is added, that supply more than doubles, to at least 7.5 million. A healthy housing market has about a six-month supply of properties, which would be about 2.4 million.
The wave of homes yet to hit the market consists of discounted distressed properties, which tend to drag down neighborhood values. Economists say the housing industry will not normalize and recover until most of the foreclosures work their way through the system — a process that probably will last several more years.
WHAT IS SHADOW INVENTORY?
Shadow inventory can be broken into three categories:
Properties that lenders have repossessed but haven't put up for sale. These homes are referred to as real-estate owned, or REOs.
Properties that are caught in the clogged foreclosure process.
Properties that are severely delinquent in loan payments and almost certainly headed for foreclosure, but haven't yet entered the process.
Calculating the size of the shadow market has proved difficult, and estimates range from 1.6 million to 7 million homes.
For its analysis, McClatchy determined the number of bank-owned homes by calculating the difference between the number of homes lenders have repossessed since 2007 and the number of homes they've sold to new owners over the same period.
McClatchy also calculated the number of homes in the foreclosure pipeline: properties that have begun the process or are so far behind on payments that foreclosure is virtually inevitable. The analysis didn't include homes that are currently listed for sale.
Data from the real estate research firm RealtyTrac, the U.S. Census Bureau and the data firm Lender Processing Services and real estate trade group figures were used in the analysis. The McClatchy analysis found the following shadow inventory:
644,000 houses already owned by lenders but not yet for sale.
2.2 million homes whose owners have received initial foreclosure notices or notices of default but haven't yet been foreclosed on.
1.9 million properties whose owners are 90 days or more behind on their payments but haven't yet been served with foreclosure notices.
In hard-hit markets such as Miami, Sacramento, Calif., Las Vegas and Cleveland, McClatchy culled thousands of property records for lender-owned homes and checked whether those homes were being listed on the open market. In a large number of cases, they were not.
Bank of America has owned a small two-bedroom on Northwest 80th Street in Miami since August 2008, when it repossessed the home from the estate of Lucile Moore. Three years later, the property isn't listed for sale on the open market, part of the bank's growing collection of unlisted properties. Bank of America didn't respond to a request for comment about this property.
The bank hasn't paid last year's $2,000 property tax bill. That's an occasional side effect of having behemoth financial institutions as property owners. In foreclosure-riddled Cleveland, financial institutions owe millions in overdue property taxes and grass-cutting fees for vacant and abandoned homes.
"I've seen plenty of cases where the banks don't take care of the homes and we have to take them into court to try and get them to pay the fees," said Mark Parks, projects manager of the Cuyahoga County Fiscal Office in Ohio.
LENDERS AVOIDING LOSSES
CitiMortgage has owned a crumbling 111-year colonial home on Laisy Avenue in Cleveland since June 2008, and it owes the city more than $7,500 in fees for grass cutting and property taxes. The home isn't listed for sale. Citibank spokesman Mark Rodgers said the lender was considering donating it to a nonprofit organization.
In the aftermath of the largest home-repossession campaign in history, mortgage lenders are holding properties off the market as a matter of strategy. Flooding the fragile market with an additional 500,000 to 1.1 million homes — many of them deteriorating and selling at deep discounts — would cause already weak prices to fall further.
Mortgage lenders have shown no indication that they're planning to ramp up foreclosure sales, and a growing number of vacant homes have sat idle on banks' balance sheets for several years.
According to the data firm CoreLogic, which has one of the more conservative estimates of shadow inventory, mortgage debt outstanding in the shadow inventory is about $336 billion. Liquidating REO homes through the sales process usually leads to significant write-downs on bank balance sheets.
Wary of seeing such large losses appear in earnest on their books, lenders have been reluctant to deal with bad loans head-on, said Ira Rheingold, the executive director of the National Association of Consumer Advocates.
"They're afraid," he said. "They don't want to take those paper losses. Their books show that they have these assets that are worth ‘X' amount of money. But those values are not real."
In Maricopa County, Ariz., public records show that Bank of America owns about 1,300 properties clustered in cities such as Phoenix and Mesa. Most of those homes aren't being marketed for sale on the lender's designated website for bank-owned properties, where only 440 Phoenix-area homes are shown for sale. Bank of America spokesman Rick Simon said some of the homes not listed on the open market might be advertised directly to investors.
In many parts of the country, the federal government is the largest institutional property owner, as government-run Fannie Mae, Freddie Mac and the Federal Housing Administration hold about 250,000 homes.
While at least 100,000 of those aren't yet on the market, a review of public records in several states showed that Fannie and Freddie were more likely than other lenders were to liquidate foreclosed homes quickly. "We don't have a shadow inventory, because our inventory consists of homes that are on the market and homes that we're bringing to market," Fannie Mae spokesman Andrew Wilson said. "Our goal is to sell as quickly as possible."
A WORSENING OUTLOOK
In recent years, the government has directed billions of dollars toward curbing the massive foreclosure crisis, pitching programs that facilitate mortgage modifications and low-stress refinances. While the various measures have had some success, all have fallen far short of expectations, and the growth of the shadow inventory has been virtually unabated.
The outlook for shadow inventory has worsened considerably over the last year because of lender paperwork problems that have gummed up the foreclosure system.
A year ago, major mortgage servicers discovered that employees were systematically cutting corners in the foreclosure process, often signing thousands of false or incomplete legal documents each day.
As details of the "robo-signing" scandal began to spread, lenders hit the brakes on all foreclosures, setting off a yearlong slowdown that continues today.
Banks are struggling to prove that they have legal standing to foreclose, and it now takes them an average of nearly two years to repossess a property, according to Lender Processing Services. In states such as Florida and North Carolina, where foreclosures are handled in court, the timeline is even longer.
More than a million foreclosures that were supposed to be completed this year have been pushed into the future, prolonging the housing crisis, RealtyTrac found.
In August 2010, before the foreclosure slowdown, banks repossessed more than 12,000 homes in Florida. In August 2011, there were only 5,000 repossessions.
Nationwide, there are 2.2 million homes stuck somewhere in the foreclosure process, and many of those cases have completely stalled.
"I've got dozens of foreclosure cases in my office that started in 2008 and are still open," Miami foreclosure defense attorney Dennis Donet said, "with lenders doing absolutely nothing to move these cases forward."
South Florida security guard Lebert Cosley has spent nearly four years fighting a foreclosure on his two-bedroom condo in Lauderdale Lakes, a suburb of Fort Lauderdale, Fla. As the bank stalled the case while it searched for crucial documents, Cosley's condo association decided to foreclose on him earlier this year, a practice that's become more common recently.
"The bank just stopped sending me information about the case," said Cosley, 65, who claimed that he was a victim of mortgage fraud and is still fighting the case in court. "Then the condo association finally did the foreclosure."
Lenders also are waiting longer before taking action against millions of homeowners who have stopped paying their mortgages.
Nearly 2 million homeowners who haven't paid their mortgages in three months or more haven't received foreclosure filings. About 800,000 of those haven't made payments in more than a year, according to Lender Processing Services.
While some of the holdup can be attributed to foreclosure prevention efforts — mortgage modifications, for example — several banks are using delay as a financial strategy, said Daren Blomquist, a spokesman for RealtyTrac.
Lenders basically are letting delinquent homeowners stay in their homes as a lesser-of-two-evils option. Foreclosing more quickly would mean more empty homes and additional maintenance costs for banks to shoulder. Lenders, already dealing with a mountain of paperwork challenges for homes in foreclosure, would only be adding to their documentation woes by speeding up new filings.
"There are more distressed properties than their foreclosure departments can probably handle," Blomquist said. "Because the foreclosure pipeline is so full, the lenders have delayed foreclosing on those properties."
Additionally, banks aren't selling homes fast enough to justify more aggressive foreclosure filings. Even at the currently slowed pace, foreclosure starts are three times higher than foreclosure sales are, meaning that properties are being loaded onto the conveyor belt much faster than they're being taken off.
"It's kind of like a pig in a python," Blomquist said. "As you start to see more of foreclosure sales and that inventory is cleared out, then you'll begin to see more new filings."
But as lenders hold off on foreclosures, struggling homeowners are strategically gaming the system as well. So-called "strategic defaults" have grown in popularity.
Under a strategic default, homeowners quit paying mortgages they deem bad investments, but they keep living in the homes or renting them out and pocketing the income.
Chae duPont, a Miami foreclosure defense attorney, said a growing number of her clients were opting to default on underwater mortgages if they were unable to get satisfactory loan modifications.
"They're making a decision to continue living in the property for 18 to 36 months and then they negotiate a short sale," she said. "It's not an easy decision, but sometimes it's the only thing that makes financial sense."
In Clark County, Nev., there are more than 28,000 homes where owners haven't paid their mortgages in more than three months but haven't yet been hit with foreclosure filings. Lenders, who already own more than 30,000 homes in greater Las Vegas, don't seem to be in a hurry to take on more: The average foreclosure timeline in Clark County is 19 months.
Nationwide, 2.5 million homeowners are 30 to 60 days behind on payments, a sign that the stagnant economy and tepid housing market continue to push more people into the foreclosure pipeline.
Given the grim outlook, lenders have begun to consider new alternatives to foreclosure. Short sales have increased this year, and real estate agents say the once-onerous process of selling a home for less than what's owed on it has become more streamlined.
Banks also are cutting deals with homeowners who agree to hand over the keys to houses rather than go through legal battles. In some cases, lenders are forking over wads of cash to convince troubled borrowers to leave their homes amicably.
"We have been making enhanced financial relocation offers, primarily in states where the foreclosure timelines are extended," said Jason D. Menke, spokesman for Wells Fargo. "We've been offering as much as $10,000 or $20,000 to borrowers who are willing to do a deed-in-lieu or a short sale."
More aggressive foreclosure-prevention measures, such as principal reductions and debt forgiveness, generally have been kept off the table.
In the meantime, the stalled foreclosure machines are beginning to gear back up again, Blomquist said.
In California, new foreclosure filings jumped 55 percent from July two August, led by huge increases by Bank of America, according to RealtyTrac.
That's not good news for borrowers such as Jill Demmel. She said she stopped making payments on her three-bedroom house in east Sacramento in December 2008, after a severe case of drug-resistant meningitis put her in a hospital for six weeks and forced her to take a year off her job as a lawyer.
Her lender, JPMorgan Chase, filed a foreclosure notice against her in April 2010.
Demmel, 57, is working again but said she couldn't make the $67,000 in back payments and fees she owed. She said one bank representative suggested that she was trying to avoid paying her bills. Her request for a loan modification was turned down in August, a week after the bank sent her a notice that the home she shares with her mother was about to be auctioned.
"This has been the worst experience of my life," Demmel said.
Meanwhile, a group of attorneys general has spent the past year trying to negotiate a settlement with major U.S. banks that are accused of wrongfully foreclosing on homeowners.
The process has been slow, as the banks have rejected calls for widespread principal reductions and public officials have called for steep penalties. California Attorney General Kamala Harris pulled out of the negotiations last month, saying the proposed agreement was "inadequate."
McCabe, the Deerfield Beach consultant, said it was in lenders' best interest to keep hundreds of thousands of struggling borrowers from entering the foreclosure pipeline, even if it meant writing down principal balances for underwater homeowners.
"Unless they agree to do principal reductions coupled with mortgage modifications, these delinquent properties will eventually have to be sold," he said. "Which means more banks will fold, because they can't stomach those losses."
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