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The Shadow Inventory: What You Need to Know

by James F. McClister

Though the elusive shadow inventory has dwindled, forthcoming changes to mortgage debt relief could lead to a swell in foreclosures over the next year.

Trudging through the sludge of economic debris left over from the cataclysmic crisis that sent the U.S. into a frenzied free fall, America’s housing market is ebbing ever closer to what real estate professionals would like to call a balance. However, while several states have all but cleared out their lingering stockpile of distressed properties, some experts believe an elusive shadow inventory threatens to slow progress even further, if not reverse it completely.

As cryptic as its name suggests, shadow inventory simply refers to the number of bank-owned and foreclosed properties, as well as delinquent mortgages, that exist but are not currently included on the MLS. Brian Kassis, a team leader with RE/MAX Gold in Sacramento told the National Association of Realtors that understanding and assessing the shadow industry is so difficult because not only does “the average agent” not realize the properties are out there, but also it’s likely banks and the government prefer the information to be muddied.

The Second Inventory

While little can be said as to the magnitude of the inventory itself, John Grant, a Washinton, D.C.-based lobbyist who represents residential investors of rehab properties, argues in a statement to NAR that it has shrunk significantly. Still, referencing recent CoreLogic figures, which stated upwards of 850,000 mortgage holders are “extremely delinquent,” Grant warns that governments “cannot modify [their] way out of this one.”

Grant takes special care to point out that despite how considerable the remaining inventory is, Mortgage Bankers Association data confirms that nearly three-fourths of loans in foreclosure remain in judicial states, which require a much lengthier legal process. He said that in order for the market to move on to any semblance of normalcy, this problem would need to first be addressed.

The Government Must Take Action

The challenge moving forward, as Grant suggested, is going to be in identifying what properties remain on the market, or are soon to hit the market, and subsequently how we can work on getting them sold, or at least looked at as viable buying options. In the past, the Department of Housing and Urban Development has used auctions to dump distressed properties, but often the homes are selling at 50 to 60 cents on the dollar.

Freddie Mac, through its HomeSteps website, have made inroads toward exposing the shadow inventory and putting the properties back into the mainstream market. Unlike HUD, Freddie Mac is pricing its distressed properties at roughly 95 percent of current market value. An official for the GSE told NAR that Freddie Mac’s goal isn’t to dump properties but sell them as any other.

Still, even as GSEs like Freddie Mac are approaching the situation with a bit more caution than in the years leading up to the 2007 collapse, homeowners remain trepid about entering the market.

The Mortgage Forgiveness Debt Relief Act of 2007 is currently set to expire at the end of 2014, and though NAR has been lobbying aggressively to extend the relief provision, bankruptcy and foreclosure are still the most viable options for many distressed homeowners.

Jenni Ruiz, broker-owner of JS Ruiz Realty in Indianapolis and a HomeSteps listing broker, says that she’s concerned about a possible bump in foreclosures over the next six to 12 months.

“If we want to continue toward a healthy market,” she says, “it’s imperative that Washington extends the legislation.”

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