The Foreclosure “Shadow Inventory” Theory
Posted by: Carleton Sheets in Value, title, Real Estate Market, Real Estate, Lender, Housing Market, clear title on Jul 28, 2009.
Someone recently asked me my opinion on the so-called "shadow inventory" of foreclosures ... the bank-owned (REOs) foreclosures that aren't on the market yet. If you've read this Wall Street Journal article, you might come to the conclusion that it's a conspiracy by banks to "under-inflate" their inventory of REOs.
Have banks been holding onto the properties because they don't want to oversaturate the already-flooded foreclosure market? Perhaps that is one reason, but I can think of others ...like title problems for one.
One of my staffers was quick to point out that the home down the street from her---which sat on the market for a year as a preforeclosure and was only foreclosed on a few months ago---had quite a few title issues. Not only were the owners undergoing a divorce, but the home was encumbered by a first and second mortgage and there were three other judgments against the property---the most serious was an "unforgivable" federal tax lien.
Keep in mind that any title issues must be cleared up before the property changes hands or the buyer's lender will not approve the transfer of funds.
Another staffer said that he had viewed a property in preforeclosure in the hopes of short-selling it, but the lender didn't accept his offer and instead foreclosed on the property. During a 2-month "hiatus," the property was given a face lift to show better and is now back on the market.
Each situation is different and all lenders are different ... but by holding and "staggering" their REO inventories aren't lenders just postponing the inevitable?
Have you noticed a property in your area that's been vacant for awhile? Are you curious enough to check the public records to see if it could have a title issue? I'm interested in hearing what you find.
