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ForeclosureRadar reports No Shadow Inventory of Bank Owned Homes

…By looking at the number of foreclosures the banks have taken back and subtracting those that have since resold, we are able to show the number of foreclosures the banks have held as inventory over time. That inventory steadily increased through September 2008, at which point the number of properties banks resold regularly exceeded the number they took back at trustee sale. With 90,365 properties in inventory, banks currently carry about 4.77 months of supply, however, it takes the banks on average 7.33 months to dispose of a bank owned home, thus current inventory is less than should be expected from normal operations given current foreclosure volumes. Bottom line – there is no “shadow” inventory of bank owned homes being intentionally withheld from the market.

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Foreclosure filings in September were relatively flat from the prior month, though considerably higher year over year due to the dramatic drop in filings in September 2008, after CA Senate Bill 1137 went into effect requiring lenders to contact borrowers before filing a Notice of Default. In addition to SB 1137, Freddie Mac and Fannie Mae went into conservatorship, and U.S. Treasury Secretary, Henry Paulson, announced the Troubled Asset Relief Program one year ago, both of which have since had impacts on foreclosure filings.

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Overall foreclosure sales remain depressed since government intervention began September 2008, though the percentage of foreclosures being sold to 3rd parties, typically investors, has risen dramatically. Despite expectations that cancellations would have started rising dramatically as homeowners successfully completed 3 month trial periods under the Home Affordable Modification Program, we instead see cancellations decreasing with no clear sign to date that the program is having any impact on foreclosures.

The number of properties on the brink of foreclosure continues to increase and has more than doubled from a year ago. With a smaller percentage of scheduled foreclosures actually being sold due to postponements at trustee sale, while at the same time seeing strong sales of bank owned (REO) properties, banks have managed to reduce their inventory by 41.8 percent from a year earlier. With the banks reselling an average of 18,943 homes a month in the 3rd quarter, and an average time to resell of 7 months (given the time taken for eviction, repairs and resale), we believe there is essentially NO shadow inventory of bank owned homes at this time. Moving forward there are more loans which are delinquent, in default, and scheduled for trustee sale than ever before, which would typically lead to a significant rise in foreclosure sales. We do not believe this increase is likely in the near future given the continued political pressure on banks not to foreclose.