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The Shadow Inventory Has a Shadow

Heroic investing logo and graphicRising home prices, limited inventory and low mortgage interest rates are being hailed as more encouraging signs of the recovery of the housing market. But a closer look at the factors driving this apparent rebound suggests that the much-anticipated “recovery” may be a superficial construct, propped up by artificial interventions and continued foreclosure related issues that cast a long shadow years after the subprime mortgage crisis that triggered the original housing collapse.

Much has been written about the irresponsibilities and outright fraudulent behavior of mortgage lenders that triggered the mortgage meltdown of 2008 and kept the massive numbers of foreclosure cases from being resolved. The wholesale granting of mortgages to subprime lenders who ended up in default led to the infamous ”robosigning “ scandal that saw hundreds of thousands of foreclosure documents mismanaged, illegally signed and omitted.

Because of all these factors, the processing of foreclosures dating from those meltdown days has proceeded in fits and starts. Some states – the so-called “judicial” states — require a court hearing to finalize a home foreclosure, while in others – the “non-judicial” states – the entire process is left to the lenders. In both kinds of states, though, the sheer number of foreclosure proceedings created a backlog that has been slowly clearing, as cases are processed and closed, and those houses hit the market.

But the “shadow inventory” of bank-seized homes that are held up in foreclosure proceedings and thus kept off the market persists. Some causes for this can be traced back to issues related to the robosigming era when mortgage paperwork was processed sight unseen or fraudulently completed and signed. And even with the robosigning settlements and new legislation regulating the behavior of mortgage lenders, foreclosure cases on the books from that period sit untouched because lenders are not able to begin the foreclosure process.

Because the inability to press forward on so many foreclosure cases has left lenders with virtually no leverage to enforce foreclosure actions, these cases exist in a kind of limbo in which homeowners have simply stopped trying to make mortgage payments and live on in the home, or even rent it out, knowing that any foreclosure action won’t happen for years, if at all.

That creates yet another subset of houses off the market as a result of the subprime mortgage crisis – a shadow of the shadow inventory, with homes kept off the market until – or unless – lenders are able to move them through the foreclosure process. As a result, the number of available properties for purchase stays low, driving prices up as demand for this limited inventory increases.

For heroic investors following Jason Hartman’s recommendations for purchasing income property, this shadow inside the shadow inventory means not just fewer houses available to buy but also reveals yet another reason why the housing recovery rests on shaky legs.


The Heroic Investing Team

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