I’ve been hearing cheery news lately in Portland real estate circles that 2012 could be the year that the housing market finally hits bottom, based upon current local inventory at 5.9 months.
One thing nobody is mentioning is the shadow inventory that is lingering below the radar. Shadow inventory is the bank owned property that has not been placed on the market by the banks.
According to foreclosure expert Michael Olenick, in a study published last week on the influential financial blog Naked Capitalism, the national shadow inventory is approximately 9,800,000 properties.
Sorry to break it to Portlanders, but a housing bottom won’t be here this year, or next year, or the following year. More than likely, another bailout of the financial system will happen in the coming years, whether that be a TARP-like capital injection or stealth Federal Reserve programs like PPIP, ZIRP, or Quantitative Easing.
Here’s Olenick:
“These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities (401K plans, pension funds, insurance companies), and other US and foreign banks. Balanced against this liability is some amount for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations.”
“It is unclear where the money from these write-offs will come from, or whether the losses have been adequately budgeted. (1/2 of Citigroup’s profits the past two years has been from the release of loss reserves). Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.”
“In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system. They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. In the most obvious example, servicers are reluctant of banks to take title to the homes after obtaining a judgment; even after the judgment is a year old and cannot be challenged.”
The housing bottom is years away, which is reality. The Obama Administration has pushed the HARP refinance program on Fannie and Freddie. Current borrowers in good standing can refinance their mortgage, regardless of whether they are underwater or have equity in their property.
Shadow inventory will be released for sale when the bank holding the inventory can afford to realize the loss. This may take a decade to absorb much of $2.3 trillion that Olenick cites, if the government doesn’t just step in and acquire the assets off their books, the way the Resolution Trust Corporation when they seized insolvent Thrifts in the late 80s.
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