Thursday, August 26, 2010

My Thoughts On The Infamous 'Shadow Inventory'

We all know there are homes that have been foreclosed upon that haven't been released for sale yet. Many of my clients would be happy to buy one of them, absolutely! There is speculation as to when they will be released for sale. Why they haven't been yet and what effects there is on the Real Estate market due to them being held.

I'm only focusing on why they are being held in this post.

My opinion, and may just be mine, but to me there is only one truly obvious answer. Follow me here, maybe need to do a little math. I excelled at math in college. So, lets say ABC bank holds the note for Mr. & Mrs. Owner. The Owners' bought their home for 600K a few years ago, borrowed 540K from ABC bank. Since we all know that the first few years are mostly interest on a loan, let's say that Mr. & Mrs. Owner still have an outstanding loan balance of 535K.

Being generous, I'll say their home is now worth 375K, less than what they owe definitely. Mr. & Mrs. Owner have been hit with the down sliding economy and Mr. Owner is now unemployed,  Feel free to switch the scenario as to why they can no longer afford their mortgage payment as you see fit.

They try the loan modification, they try a Short-Sale, they get the Notice of Trustee Sale on their front door after all of their efforts and the homes gets foreclosed upon. Forget about the fact that they submitted every possible document for the loan mod, forget that they had a bona-fide buyer for their home during the Short Sale listing, and forget about seeing that home back on the market as an REO any time soon.

Now, Mr. & Mrs. Owner become Mr. & Mrs. Renter. And, ABC bank now has another house in their asset portfolio. Oh really, just what they want, another property in that portfolio.

Again, my opinion. I am not a banker and I may get blasted for this somehow. But, ABC bank forecloses on this home with a mortgage of approximately 535K, remember? So, that is the value that I presume they are giving it in that asset portfolio, right? Make sense to you too? But, as we all know, that home, once released for sale in any MLS may only be valued at 375K now. Sooooo, I'm saying this.... If they have stockholders and board members to report to with all those portfolio numbers, wouldn't it make more sense, to them at least, to note an asset of 535K vs. the true asset value of 375K? Because once the true value comes out, when it goes up for sale, ABC bank just lost another 160K on paper. And, paper is what they use to value things.

Just my opinion. I'd rather have them just release these properties sooner than later. Get this over and done with so our economy can move forward. And myself, and my fellow agents, can help our buyers get into homes now, not next year or the year after.

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