Irvine Housing Blog

Shadow Inventory Builds As Lenders Shift to Short Sales

Posted: 23 Jul 2010 03:30 AM PDT

The shift to short sales is increasing shadow inventory. Will the liquidation be any quicker or more orderly under a short sale process? We will see.

Irvine Home Address ... 2422 SCHOLARSHIP Irvine, CA 92612
Resale Home Price ...... $409,000

Let's dance
Let's dance

Let's dance, put on your red shoes and dance the blues
Let's dance, to the song they're playin' on the radio

Let's sway, while colour lights up your face
Let's sway, sway through the crowd to an empty space

If you say run, I'll run with you
And if you say hide, we'll hide

David Bowie -- Let's Dance

The result of the amend-extend-pretend dance is shadow inventory. Lenders cannot waive a magic wand or bury their heads in the sand and make delinquent loans disappear. People are not paying their mortgages; in fact, more people are not paying their mortgages every day. Delinquency rates are still rising with no end in site. Unemployment is often blamed, and it certainly plays a role, but astronomical delinquency rates was predicted by everyone who saw the housing bubble for what it was. People took on debt they could not afford, and with or without unemployment, delinquency rates were going to be very high.

Lenders have been playing games with foreclosure filings since 2008 when the subprime foreclosures wiped out the housing markets wherever these loans were concentrated. Once the rate of delinquency began to exceed the rate of foreclosure, we began creating shadow inventory. At first many pundits thought we could amend our way out of the problem. As I pointed out, this is merely a game of Bailouts and False Hopes. The dismal failure of the various loan modification programs surprised no one who understood the housing bubble.

The growth of shadow inventory has been steady and consistent since 2008. The current foreclosure inventory is huge, but shadow inventory is at least four-times larger. There are 3,600+ Distressed Properties in Irvine, and There are 36,000+ Distressed Properties in Orange County. As lenders shift their focus from foreclosure to short sale, shadow inventory will continue to grow unless they can pick up the pace of sales though the short-sale process.

As I pointed out in Banks Cancel Foreclosures in Shift to Short Sales… For Now:

The HAFA program pays the second mortgage holder $1,500 to go away. Most aren't taking it. Since many Orange County borrowers have assets, these second mortgage holders are demanding the sellers liquidate and pay them off before they approve the sale. In typical OC fashion, most of these sellers are unwilling to pay up. Perhaps at the lower rungs of the housing market where the borrowers have no assets, more short sales will go through, but in more affluent areas, the HAFA program is doing nothing to facilitate short sales.

Lenders and services will try to force more short sales, but their efforts will ultimately fail in the more affluent areas. Then they will need to go back to the foreclosure process to clean up this mess once and for all.

Lenders Slow Foreclosures By 5% in 2010, Boosting Shadow Inventory: RealtyTrac

by JON PRIOR Wednesday, July 14th, 2010

Foreclosure filings dropped 5% over the first half of 2010 as lenders continue to delay proceedings to focus on short sale and loan modification efforts, according to RealtyTrac, an online foreclosure marketplace.

More than 1.6m homes received at least one filing, including default notices, auction sale notices and bank repossessions over the last six months, according to the report. That translates to one in 78 homes. Foreclosure filings remain 8% above the amount issued in the first half of last year.

James Saccacio, CEO of RealtyTrac, said at the current pace, more than 3m properties will receive a foreclosure filing by the end of the year, and lenders will repossess more than 1m of them. According to a report from the Toronto-based Capital Economics, the weight of the shadow inventory may contribute to a double dip in the housing market. The report found that for every home currently on the market, two homes are waiting to be sold.

The math is inescapable. Prime loan delinquencies have increased for 37th straight months. If foreclosures and foreclosures filings have actually decreased, that means lenders are falling farther and farther behind. That is shadow inventory: houses where the owners are delinquent but no filings have been made.

“The roller coaster pattern of foreclosure activity over the past 12 months demonstrates that while the foreclosure problem is being managed on the surface, a massive number of distressed properties and underwater loans continues to sit just below the surface, threatening the fragile stability of the housing market,” Saccacio said.

Foreclosure filings decreased 3% in June after another 3% drop in April. It’s the third straight month of declines. Foreclosure filings were down 7% from June 2009. Despite the recent downward swing, June marked the 16th straight month of more than 300,000 filings.

For the second quarter of 2010, foreclosures dropped 4% from Q110 and remained 1% above Q209. As default and auction notices fell, REOs increased 5% from the last quarter and 38% from Q209. It’s the most REOs measured in a quarter since RealtyTrac began publishing the reports in January 2005.

“The second quarter was a tale of two trends,” Saccacio said. “The pace of properties entering foreclosure slowed as lenders pre-empted or delayed foreclosure proceedings on delinquent properties with more aggressive short sale and loan modification initiatives. Meanwhile the pace of properties completing the foreclosure process through bank repossession quickened as lenders cleared out a backlog of distressed inventory delayed by foreclosure prevention efforts in 2009.”

Nevada continued to hold the highest foreclosure rate in the country. Nearly 6% of all Nevada properties, which equals one in 17 homes, received at least one filing in the first half of 2010.

Arizona holds the second highest. There, 3.36% of its units received a filing, equaling one in 30 homes. Florida was third with 3.15%.

More than 340,000 properties in California received a filing in the first half of 2010, the state holds the highest foreclosure volume. Florida was second with more than 277,000 properties.

I recently spoke with a VP at a major title company who told me that the FDIC is pressuring services to shift from foreclosure to short sales. Those servicers who want to dispose of FDIC properties need to have a ratio of foreclosures to short sales that strongly favors short sales. Since a short sale requires a cooperative owner, loan servicers are working on their outreach programs to get more owners vested in the process. The properties that are abandoned for various reasons will end up as foreclosures, but lenders and servicers are now doing all they can to increase the number of short sales.

The argument in favor of short sales is simple: the asset recovery is better. If a property goes to auction, it needs to be discounted by 20% to attract all-cash buyers. If the property can be sold at short sale, this 20% is recovered by the bank -- at least in theory. In reality, if the loan sits on the lender's books for another six months of missed payments while the parties bicker and the borrower hides assets, the amount recovered isn't any larger than if foreclosure had occurred in a timely fashion. However, since the FDIC is not accounting for the lost payments, and since they don't want to expedite the liquidation and lower home prices, opting for the longer short-sale process makes perfect sense -- to them.

A crushing lender loss

Today's featured property was purchased by the original owner on 2/23/2006 for 623,000. The owner used a $497,600 first mortgage, a $62,200 second mortgage, and a $63,200 down payment. My data service does not have the information on when this owner when delinquent. The property was purchased at auction on 6/17/2010 for $321,000. The opening bid was only $225,500, but the property was bid up from there. The auction price is nearly 50% off the original purchase price. The second mortgage holder was wiped out along with the owner's down payment.

The flipper will make a substantial profit if he can get asking price. It isn't likely much was spent on renovation as these are new stacked-flats in a large condo building. A nearly 20% profit turned over in less than 60 days makes for a great annualized return.

If you would like to learn how you can get involved with trustee sales, please contact me at sales@idealhomebrokers.com.

Irvine Home Address ... 2422 SCHOLARSHIP Irvine, CA 92612

Resale Home Price ... $409,000

Home Purchase Price … $321,000
Home Purchase Date .... 6/17/2010

Net Gain (Loss) .......... $63,460
Percent Change .......... 19.8%
Annual Appreciation … 329.0%

Cost of Ownership
-------------------------------------------------
$409,000 .......... Asking Price
$14,315 .......... 3.5% Down FHA Financing
4.59% ............... Mortgage Interest Rate
$394,685 .......... 30-Year Mortgage
$80,779 .......... Income Requirement

$2,021 .......... Monthly Mortgage Payment

$354 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$34 .......... Homeowners Insurance
$451 .......... Homeowners Association Fees
============================================
$2,861 .......... Monthly Cash Outlays

-$326 .......... Tax Savings (% of Interest and Property Tax)
-$511 .......... Equity Hidden in Payment
$25 .......... Lost Income to Down Payment (net of taxes)
$51 .......... Maintenance and Replacement Reserves
============================================
$2,099 .......... Monthly Cost of Ownership

Cash Acquisition Demands
------------------------------------------------------------------------------
$4,090 .......... Furnishing and Move In @1%
$4,090 .......... Closing Costs @1%
$3,947 ............ Interest Points @1% of Loan
$14,315 .......... Down Payment
============================================
$26,442 .......... Total Cash Costs
$32,100 ............ Emergency Cash Reserves
============================================
$58,542 .......... Total Savings Needed

Property Details for 2422 SCHOLARSHIP Irvine, CA 92612
------------------------------------------------------------------------------
Beds: 2
Baths: 2 baths
Home size: 1,260 sq ft
($325 / sq ft)
Lot Size: n/a
Year Built: 2005
Days on Market: 16
Listing Updated: 40367
MLS Number: S623000
Property Type: Condominium, Residential
Community: Airport Area
Tract: Ave1
------------------------------------------------------------------------------

A gorgeous top floor (4th) unit in the exclusive Avenue One Community !!! 2 bedrooms, 2 baths with a loft Open to Living Area Below. High Ceiling in the living room. No one above. Open and functional floorplan. Grourment Kitchen with granite countertops stainless steel appliances. Elegant Clubhouse and superb onsite amenities including a comfortable lounge w/plasma TV , fitness center, pool tables, indoor basketball court, pool and Jacuzzi. Located at the heart of commerce and entertainment in Irvine. Close to shopping, museums, theaters. Easy access to 405. A truly exclusive home!

Grourment?

I hope you have enjoyed this week, and thank you for reading the Irvine Housing Blog: astutely observing the Irvine home market and combating California Kool-Aid since 2006.

Have a great weekend,

Irvine Renter

Mission Viejo 3bd/2ba 1,176 sqft condo - $259,900

Posted: 22 Jul 2010 03:09 PM PDT

Our latest Exclusive Access Property is a 3bd/2ba 1,176 square foot condo in Mission Viejo priced at $259,900. This home is not yet on MLS but will be in 7 days.

If you want to learn more about this property, please contact us: