The massive shadow inventory is about to come in to the light. Shadow inventory refers to those properties which would have been foreclosed and resold by now were it not for various extraneous incentives (here and here, for example) skewing the market. Mortgage lenders have been reluctant to foreclose on delinquent mortgages for fear that dumping that much inventory that quickly would depress the market and make their losses that much greater. Further, once a mortgage is officially in default it impacts the way profit and loss statements are reported to the FDIC and to the stockholders. Reports showing lots of toxic inventory will drive stock prices down, prompting frowny faces 
all around.
There are consequences to this. There is not as much inventory available in the market as would normally be expected. Naturally homeowners with equity are reluctant to sell at depressed prices unless forced by outside pressure to do so. Home owners with negative equity can’t sell unless they are willing and able to kick in a big chunk of change from their own pockets. This has had the consequence of driving prices upwards as would-be home owners who were unable to buy during the peak of the market find that they are now able to do so and are competing for limited available inventory. Lower priced homes in particular are receiving multiple offers resulting in bidding wars. Bidding wars create social proof that this is a good time to buy, feeding the frenzy even further.
Meanwhile the shadow inventory grows. Banks have been refraining from issuing Notices of Default. I have spoken to numerous home owners who have not made a mortgage payment for over a year and haven’t heard a peep from their banks. Many Notices of Default and Notices to Sell are filed but the bank fails to follow through with the foreclosure. In both these cases the bank is letting the home owners stay as caretakers for what will necessarily become their property, thereby avoiding costs for maintenance, insurance and taxes for which they would become responsible the moment they become the owners. Of course many of these delays are the result of homeowners trying to work out a loan modification (only about 1% are successful!) or a short sale (on which more in a moment). And very often the bank takes the property back in foreclosure and does not put it on the market (I see a lot of this), sometimes becoming the landlord either for the previous owner or new tenants, sometimes they just leave it vacant.
The result is that in many communities the number of homes actually on the market is dwarfed by the number of homes facing foreclosure. In many cases the ratio is grater than 2:1 and even 3:1.
It is not going to stay that way. The FDIC has taken notice of the banks’ practice of hiding their toxic inventory. They shut down over 100 banks last year (Remember IndyMac, Wachovia & Washington Mutual?) and is on track to shut down over 200 this year. The word from the FDIC is, “Clean up your toxic inventory or we will do it for you.” And the banks said, “Yessir!” Funny, they never say that to me.
The FDIC is not the only agency of the government taking notice. Our political masters in Congress have made several ham fisted attempts to clean up the housing bubble mess they’ve created (they were for it before they were against it, but not really). Now, finally, like any blind squirrel worth his salt, Congress has finally found a nut, and what is even more special, has not devoured it forthwith but made it available to Taxpayers-R-Us. ‘Course it’s gonna cost Taxpayers-R-Us, but not too bad. Who’d ‘a thunk it?
The hammer is coming down, finally, on all those homeowners who’ve been on the brink of foreclosure for the last year and a half, as well as the many thousands who have yet to undergo the process and who inevitably will as the economics of their situation becomes unmanageable. At long last there is a way to restore the market to some form of rational balance and help homeowners in trouble exit their predicament with a modicum of grace and a minimum of pain. You can get more info over here.
What happened to this poor shlub doesn’t have to happen to anybody facing foreclosure.
