Michael Olenick: 9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom

By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick

“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors. This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.

Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), to “about 3 million” (Barclays Capital), to 4 million (LPS Applied Analytic), to 4.3 million (Capital Economics), to LPS Applied Analytics, to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities).

Why do these numbers vary so much? Even though CoreLogic is generally considered to have one of the best databases of loans, its estimates of loan performance and odds of default are based on credit scores, which is a badly lagging indicator. Laurie Goodman is seen by many as having the most carefully though out model, even though industry insiders are keen to attack her bearsish-looking forecast.

I have a large database of my own, and am familiar with housing and mortgage information sources. I’ve come up with my own tally of shadow inventory and have also tried to analyze — OK — take a stab at – what I call “shadow liability,” meaning the amount of money taxpayers, investors, banks, will be lose if those homes are liquidated. Assumptions using those terms are also in the attached spreadsheet. My analysis comes up with a total close to that of Goodman’s range, 9.8 million using a narrower definition than Goodman’s of what constitutes shadow inventory.

Put more simply, things are actually worse than any of the prevailing estimates indicates, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.

Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden. Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts.

My Methodology

My data comes from several sources. Default information is from the October, 2011 LPS Mortgage Monitor. Housing information, including the number of houses with mortgages, comes from the US 2010 US Census and the 2009 Statistical Abstract. Median home prices — the likely value of the loans that are either in foreclosure or will be soon, is from the FHFA; specifically the Q2, 2006 state-by-state median home prices, when many of the bubble loans were written. Note: these prices are used to approximate the principal value of the loans, not what the properties are currently worth.

Because not all this data overlaps entirely some extrapolation was necessary; when required to extrapolate I tried to do so conservatively. An example is how I arrived at the number of mortgages in the US, a step on the way to calculating the number of mortgages in default.

The first step was figuring out how many housing units with residential mortgages America has. According to the 2010 census, America is home to 131.7 million housing units. Of these, 76.4 million are owner-occupied, 37.5 million are rental units, and the remaining 17.2 million are vacant, and the remaining 600K are houseboats or other exotic housing. Of the 37.5 million rentals, some are in apartment buildings that would be financed with commercial mortgages, not residential ones. Commercial loans are structured differently than residential loans, and are easier to renegotiate, so they I’ve excluded from this analysis.

To be conservative—to exclude more loans as commercial than actually are, rather than risk leaving commercial loans in the analysis—I’ve assumed that any building with 5 or more housing units is in a building that either has a commercial loan or no mortgage at all.

According to the National Multi-Housing Council, using 2011 Census data, has determined that nationally, 42% of renters live in buildings with 5 or more units. Applying that percentage to the 37.5 million rental units, and subtracting that from total renters, I end up with 21.8 million rental housing units that could have residential mortgages.

In total, then, I have 76.4 million owner-occupied homes, 21.8 million residential rental units, 17.2 million vacant homes (which includes, among other things, vacation homes and abandoned ones) and 16.3 million other, mainly units in commercial properties. All in all I end up with just over 115 million homes that could have a residential mortgage on them. But how many of them? Well, the Census reports that in 2010, 68% of owner-occupied units had at least one mortgage. I used this same 68% for investment (residential rental) properties and vacant (primarily vacation and abandoned single family homes) properties.

I believe this 68% figure is appropriate for two reasons. First, a person who has a mortgage on their own home is unlike to buy a vacation house or an investment property with cash. Indeed, even a homeowner living free and clear in their own home might need a mortgage to buy second property. So assuming the mortgage rate for investment and vacation homes is the same as owner occupied surely understates the number of mortgages. Second, the mortgage rate on abandoned homes surely is nearly 100%; why abandon a home if it’s not in foreclosure?

Using that math, I came up with 78.6 million mortgaged properties. This figure is substantially higher than many other estimates, including Goodman’s Amherst study, though the likely reason is that the census data the analysis relies upon is relatively new. Goodman’s study uses 53.7 million mortgaged homes, though the census reports 52.2 million owner-occupied loans alone, in additional to rental properties, mobile homes, and vacant properties. Given that the census cost $13 billion to produce — an amount no private organization could afford — and 2010 results were not available at this level of granularity until relatively recently, I would not be surprised to see upward revisions to other base housing unit figures in the future.

To estimate shadow inventory, I used the delinquency data from LPS Analytics. They add up loans that are delinquent, loans that are in foreclosure, then come up with a state-by-state percentage of “non-current” — loans that are, or are likely, to end up in foreclosure. There is some ambiguity in LPS’ figures; specifically the definition of “delinquent,” and whether they are counting homes or loans.

To illustrate a potential problem with these assumptions, let’s take a theoretical example of 100 houses. Let’s assume 68% have mortgages, a figure from the census, so 68 houses have mortgages. Then let’s assume these homes are in FL and 22.9%, or 23 houses, are either in foreclosure or likely to end up there soon. I’m assuming this means that 45 houses are current, 23 houses in trouble, and 32 houses paid-off, though I concede that it could mean 12 houses with two mortgages are in trouble, 32 are paid off, and 56 are fine.

This methodology differs from Goodman’s, which relies upon predicting both likely defaults and re-defaults for non-sustainable modifications, as well as a small number of homes likely to strategically default as liquidations begin and home value plummets. Conversely, my model assumes all 90-day delinquent loans will result in foreclosure and liquidation — and I’ve yet to see enough good-faith modifications to assume otherwise — whereas Amherst’s believes the figure is likely to be 80-90%. However, I do not allow for strategic defaults, which more than offsets my skeptical assessment of the mortgage mods now begin offered (my assumption is that when people default suddenly, it is really an anticipatory default: the borrower could see he was going to hit the wall, but defaulted before he was completely broke. Given the job market costs of having a foreclosure or bankruptcy on your credit record, I don’t regard that as a bad assumption). Goodman has three buckets of current loans that she anticipates will produce defaults: badly underwater loans (loan to value ratios of over 120%), moderately underwater loans (LTVs of 100% to 120%) and loans with equity borrowers will default upon anyway (LTVs less than 100%). She estimated those three groups would produce eventual foreclosures of 2.8 to 3.7 million of her total. Thus my somewhat smaller tally is actually more dire, because it consists of borrowers who are having trouble making payments now, as opposed to borrowers who are anticipated to default at some undetermined point in the future.

That being said, except for the lower housing unit loan base Goodman’s analysis seems rock-solid, though it would mushroom if used with my higher base housing unit figures and more pessimistic view of servicer’s ability to mitigate defaults. Together they would paint a devastating picture of the future, so I won’t try to reconcile them .. at least not yet.

Using the assumptions above, and applying the LPS data state-by-state, there are 9,800,000 houses in shadow inventory.

If these loans were taken out for the median value of a state-by-state home price, using data from the FHFA, for Q2, 2006, there is $2.3 trillion of home values at near the market peak. The mortgage balances are going to be lower than that, but given how widespread equity extraction came to be (and it is probably that the most levered homes are hitting the wall), it is not unreasonable to assume LTV ratios relative to peak values of 80%. Loss severities on prime mortgages are running at roughly 50% and are 70% on subprime (note that with more borrowers fighting foreclosures, and given that loss severities on a contested foreclosure can come in at 200% or even higher, so using these assumption is certain to understate actual results). $2.3 trillion x 80% x 50% = $900 billion.

These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities, and other US and foreign banks. Balanced against this liability is some amount figure for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations.

It is unclear where the money from these write-offs will come from, or whether they losses have been adequately budgeted. Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.

In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system. They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. In the most obvious example, servicers are reluctance of banks to take title to the homes after obtaining a judgment; even after the judgment is a year old and cannot be challenged.

For example, filing volume in Palm Beach County, FL, started to increase towards the end of 2010 but judgments remained flat and certificates of title — where a bank actually takes title to a house, recognizing the underlying financial loss and evicting the family — actually slowed down despite an enormous backlog of judgments. This contrasts to the banks incessant complaints of a broken court system, because a judgment more than one year old in FL cannot be challenged for fraud. This leads to the conclusion that it is the banks — who are unwilling or unable to absorb the losses — rather than the courts or homeowners that are actually slowing down liquidations.

Let’s walk through these figures. In Palm Beach County, the number of Certificates of Title issued for Q1-4, 2011, was 1,594, 1,886, 1,413, and 1,299 respectively; the number of judgments was 289, 480, 281, and 367 respectively. Let’s compare that to 2010, when there were 3,105, 9,704, 7,259, 1,033 judgments in Q1-4 respectively and 1,534, 2,207, 3,065, and 2,738 titles transferred.

Many of these cases are uncontested; yet it is not uncommon in foreclosure court to see bank lawyers arguing vehemently for delays with nobody on the other side.

Let’s review more figures: in Palm Beach County there are 10,794 more final judgments of foreclosure that are at least a year old than there are certificates of title issued. Again, there is nothing anybody can do to challenge a judgment after one year. Servicers appear to be milking ongoing costs and fees from investors. Cross-referencing that to a softer data point I’m reminded of a worker, in my home state of FL, sent by a company I hired to perform a home repair. He’s a young man who said he purchased a condo, lost a prior job that paid better, and stopped paying for his condo for which, he noted, similar models were selling for at a 80% discount to what he owed. He filed no defense to his foreclosure whatsoever — he was positively clueless about the judicial system and did not hire a lawyer — but he ran to his truck to show me a Notice of Voluntary Dismissal of his foreclosure, asking what it meant. It’s clear that while some homeowners do their best to avoid the auction block, even those who do nothing all have a statistically good chance of staying put.

There is other anecdotal evidence suggesting banks do not want these houses or, more accurately, do not want the write-offs that actually taking the houses would force:

• Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage. This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations.

• Every year the Republican dominated Florida legislature introduces legislation to speed along foreclosures, and every year the legislation fails. I personally believe this legislation to be both immoral and arguably illegal. However, it is impossible to believe this bank beholden governmental body is willing to repeatedly bite the hand that feeds them .. unless their master makes it quietly clear that they do not actually wish to accelerate liquidations but cannot publicly admit as much.

• It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty.

• Bank-instituted delay tactics are not limited to Florida. Not long ago I spent the day with Sean O’Toole, CEO of foreclosureradar.com. Sean knows the foreclosure world and his data is, literally, the best in the Western states he covers. He noted the same effect in CA; lender-initiated delay after delay after delay selling a home. In CA, after three delays both parties must approve a further delay but Sean said banks routinely file stipulated delays when, in fact, borrowers just want to literally move on.

• There is the well-known tendency of servicers to “lose” paperwork, where borrowers beg for mortgage modifications, short-sales, or deeds-in-lieu. These delay tactics — rather than just answering “no” to a request — make sense in this context because leaving a house in foreclosure limbo, forever, is the only solution that delays the inevitable balance sheet busting write-offs.

• Lastly is the unwillingness of banks to agree to principal reductions, or even modifications with principal balloon payments, which would yield more long-term money than a foreclosure. Servicers appear to want these homes in the higher-yielding default status, even if they are reluctant to actually push the homes to liquidation, to take title on behalf of investors.

We’ve written relentlessly about servicer abuses, but we’ve almost always contextualized these abuses through their effect on borrowers. Staring through data, especially data at this scale, complexity, and with strong economic ramifications, is like looking through a dirty window. But as we wipe away layer after layer of schmutz the picture is becoming clearer. Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors. Individual American families do not deserve to suffer these behaviors, that increase the losses while delaying the uncertainty, and neither do pension funds, European villages, municipalities, or other unsuspecting entities who actually funded these loans.

Few people are going to complain when they’re not paying their mortgage that there is no mark on their credit-report nor a foreclosure; a few of the more perplexed ones — or those that want to bring a bad mortgage to resolution — may speak out, but most remain silent.

Similarly, many investors, and surely the banks themselves, know about these figures. But as both sides spin their wheels, the problem continues to spiral out of control.

Finally, there is government behavior that makes no sense, especially from the Obama Administration. We have repeatedly seen federal intervention when it is inappropriate and unwelcome, and we’ve seen no intervention when it is warranted. For example, the Administration has actively intervened in the multistate Attorney General settlement talks even though this is, by definition, a state issue. However, they have done nothing to prosecute overt and clearly proven interstate crimes surrounding document forgery.

There is a strong argument that campaign donations are at work, but given the lopsided donations from the financial services industry to Republicans one would think Obama would send a message by taking firm control over the FHFA, the FDIC, the SEC, the OCC, the Treasury, the Justice Department, and strong-arming the Federal Reserve into offering substantive help to borrowers and investors. Yet, at every level, the President has failed ordinary Americans. Even the most egregious behavior results in dead silence .. we don’t even get a yawn. Every program has been an unmitigated disaster, especially HAMP. When Administration figures do intervene their influence is overtly skewed in favor of the banks.

Surely Obama and his advisers realize these problems. It seems inevitable that we will soon face either widespread bank failures and a staggering loss in home values (although arguably an increase in middle-class liquidity), or another much larger bailout; a fraud bailout. Either option is likely to sink President Obama’s popularity rating in much the same way it is likely to sink individual home values. Despite this, the president continues to play Kick the Can, presumably hoping these problems won’t be widely recognized prior to the election in November, while the banks continue to kick everybody else.

Market manipulation used to be illegal, especially in cases where there was asymmetrical information or unequal bargaining power. Pundits use the term “heads we win, tails you lose,” but that actually understates the problem because it implies that there still exists individual parties and counter-parties. Our more modern arrangement looks more like an aristocracy, where there isn’t a genuine market at all but rather a pseudo-market operating like a private ancient tax collector, demanding the increasingly poor peasants feed the monarchs and his cronies rather than feeding their own children.

I’m often told that people don’t care about deadbeats who haven’t paid their mortgages. But people fail to realize that this affects everybody. Ordinary Americans see the effects of this manipulation every day; it affects them profoundly, even if they don’t understand it. All but the most irresponsible aristocrats throughout history realized there were boundaries. Their motivations may have differed — some cared about the well-being of the peasantry while others feared the guillotine — but for millennia all but the stupidest acknowledged and avoided pushing the populace too far. If we’re going to live under an American Nuevo-Feudal system, the least we deserve are overlords at least as smart as the despots they’re trying to imitate.

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  1. Lucky

    There is a light at the end of the tunnel. The longer the mortgages remain unpaid, the more profit the ~ 700-1,400 trillion mortgage derivatives will generate.

    1. Lucky

      Wow:Matt Weidner, you should be writing simialar articles. You’re the heavy hitter in this business

    2. Jane

      Here’s a link to Laurie Goodman’s (Amherst Securities) report, with the 8-10 million foreclosure projection.


      I live in Florida where 23% of mortgage loans are either delinquent or in foreclosure, and 45% of loans are underwater. Foreclosure isn’t even a dirty word here anymore. More and more people are being quite open about not paying their mortgage. They see it as a sound business decision, and as more people default, prices decline, putting more homes underwater and the downward spiral continues.

  2. matt weidner

    HOLY BOMBSHELL- if people would turn off the tv, this country would be in real trouble. What would a “run on housing” look like? Like a reverse run on the banks…instead of trying to take money out, money would stop going in….we would stop fueling the monster that is the international financial system, complete with all the lies and destabilizing deceit.

  3. F. Beard

    The problem with principal reductions is they do nothing for non-borrowers. And the counterfeiting cartel (the banking system) has surely cheated them too (via negative real interest rates).

    So what? Is Steve Keen’s idea of a universal bailout too radical?

    And politically, who will oppose free money (“restitution checks”) from the government?

    Our money system is morally repugnant. It’s time we abolish it before it abolishes US.

    Or continue on as usual. The world has to end one day…

    1. Publius

      The bigger problem with principal reductions is they encourage more defaults – start widespread principal reductions and watch a massive wave of underwater borrowers defaulting.

    2. R Foreman

      > And politically, who will oppose free money (“restitution checks”) from the government?

      Just the debt merchants. Those pigs and their trained minions in finance and government are everywhere. Barack Obama and most or all of his advisors are among them.

      The debt merchants of old, the Rothschild progeny, set about to infiltrate high society and government, and they did their job well.

      The USA founders didn’t have a vision for debt-money, but that didn’t stop the bankers, and in a short 200 years our country has been remade (all of modern civilization too).

    3. ohmyheck

      As a “non-borrower”, with a paid-off mortgage, I don’t give a shit. I have no problem with “Jubilee”, neither did the Romans, every 30 years or so, and ya, I am my brother’s keeper. I don’t have “mine” until everyone else does too.

        1. Up the Ante

          And may FatCat, bankster stooge, serially ‘violate’ the both of you, as Karl Denninger would say.


          Karl does offer another option, namely the perennial ‘skullfucking’ should the ‘violation’ not be to your tastes.

  4. spacecabooie

    “I’m often told that people don’t care about deadbeats who haven’t paid their mortgages. But people fail to realize that this affects everybody.”

    The utter collapse in value should not be a burden carried by the owner of a primary residence single-family homeowner (i.e., not an inverstor or speculator, whi os prepared, or shoudl be, to see their “investment” lose value).

    The idiots whose homes are paid for – and who had the opportunity to purchase when prices were much lower but crow about teh greed and irresponsibility of more recent home market participants, and who are about the only homeowners who are not underwater – have collectively formed a strawman position that is terroristically holding the majority of the country hostage.

    The parameters within which their financial and economic activities take place are far different from those of the majority, and I would even suggest that to a large extent their contribution is not and never has been substantial. Job creators ? Risk takers ? Skilled professionals or laborers ? Just floaters, hangers on, and deadbeats, themselves, they are.

    1. JTFaraday

      “The idiots whose homes are paid for… have collectively formed a strawman position that is terroristically holding the majority of the country hostage.”

      Wait–did you not just read the article that detailed how it’s the effectively bankrupt banks that are terroristically holding the country hostage lest you idiots discover their insolvency?

    2. mac

      Whatever you think you said is balogna. If folks own homes with no mortgage what they might have been worth is not relevant. The relevant issue is that the banks are cheating , hiding losses much like a gambler with an ace up his sleeve.

      1. Ray Phenicie

        “if folks own own homes with no mortgage what they might have been worth is not relevant” ? ? ?

        Think about that –
        the person in the home with no mortage, can they ‘own’ it? How could they? Maybe you meant to say “the family in the residence can hardly be concerned about what the building is worth since they have no stake in it financially.” .
        Not sure what you meant but . . . .

  5. jake chase


    I know it seems simple minded to suggest this, but isn’t it likely that EVERY home purchased on mortgage since 2003 is now under water? I would return to yr 2000 for a reasonable value on any house which is that old. I know there are homes changing hands at higher prices, but these are very easy to buy and nearly impossible to sell.

    1. Michael Olenick

      I was trying to figure out the likely value of the loans, not the value of the homes. The difference, minus fees, and advanced interest, would be the offset to the shadow liability. I haven’t thought about it much (head’s still spinning from this study) but the right figure is probably the current value minus the likely bubble-era value. One problem w/ current values is that they’re artificially inflated (I know, tough to believe but true) from the shadow inventory. Lower supply of course creates higher prices, so even our pathetic current prices are inflated to some extent, and in some states that can be a substantial figure.

      For the “what about people who own their own homes” crowd .. I own my home. In Florida. I feel for ya’, but that’s life. I’m not a baby-boomer but I suspect what’s driving a lot of this is boomers that factored in their home “value” for retirement. But even during the bubble that was unrealistic because of demographics; they’re not called the baby boom for nothing – there’s lots of them compared to other age groups. So if they all started selling their homes to retire to small condo’s here in FL, selling to a smaller generation behind them, even if there hadn’t been a boom and bust there’d still be a problem.

      1. F. Beard

        … selling to a smaller generation behind them, even if there hadn’t been a boom and bust there’d still be a problem. Michael Olenick

        The revenge of the aborted babies.

        Oh well. There are always poor immigrants to sell them to – or not.

        Also, I understand that some animals don’t breed well in capitivity. Was that the problem with the Soviet Union?

        1. Jeff

          Offset by the enhanced property values nationwide as aborted thugs to be don’t lower property values by being born and growing up.
          I’ll stop speculating if you do.

      2. neidermeyer

        First off ,, GREAT ANALYSIS …

        I am in Florida and have no problem believing your numbers ,, LPS shows every heavily populated FL county at 15-25% in default defined as 90 days+ ,, and with valuations 65% down from the peak and sale prices generally at late 1990’s levels this will only increase. Most people financed at 40% of take home (above the high norm of 31%) and with gross income down 10% , real unemployment at 16% and expenses higher in energy and food I can only see things getting worse .. The banks are naked , have no reserves and cannot resolve the problem even with $trillions from the taxpayers… Time to let the TBTF’s fail.

    2. ron

      You have to add to that pool of property the mortgage holders who purchased before the year 2000 and did a cash out refi during the bubble years. This is what makes the distress pool so large if it was only new home buyers during the bubble period it would not be so bad but many homeowners did a refi based on there new bubble valuations which created millions of under water homeowners.

  6. ron

    Nice to see some recognition that the distressed pool of property is supersized. This is a point I have made from the beginning that the numbers would overwhelm any remedies the the political class might generate since there reference was the 1989 housing bust which was regional and far easier to manage. The banks and Federal Government have never been able to wrap there arms around these numbers and when they do the recognition of its implication for the economy is frightening.

  7. Justicia

    “So if they all started selling their homes [stocks, bonds, ETFs, fill in the asset] to retire …, selling to a smaller [less affluent] generation behind them…”

    Deflation here we come.

    1. F. Beard

      Helicopter drops can fix deflation but people are so morally confused they can’t see the necessity for them.

      And of course the deflation vultures are licking their chops at the prospect of firesale asset prices and slave labor rates even though a universal bailout would go to them too.

    2. scraping_by

      There is a genre of financial books touting methods to make money on “the gray wave.” Or “pig in a python” or what have you. It’s a staple in the rich dad/Poor Dad line. Liquidating the stock positions in their 401(k)’s, putting their houses on the market, buying into gilt edged bonds, and all in the same 10 year time frame.

      I misremember the advice we smart operators were supposed to follow surfing the gray wave. I think it was gold and medical stocks. Maybe funeral parlor franchises and condo developers. Escapes me.

  8. rjs

    im not sure i would include the 30 & 60 day buckets in shadow inventory…just because someone misses a payment or two doesnt mean they’ll lose their home…

    then you have to realize that even those homes that are in the foreclosure process are still be lived in, & the average number of days that homes in foreclosure had gone without making a house payment is rising with every LPS report…i couldnt find the exact average number of days that homes in foreclosure had gone without making a house payment in either the press release or the report for November, but extrapolating from the data given & their charts i’m guessing that set a new record of around 645 days…


    this chart is what LPS calls their “pipeline ratio”, or the number of months it would take to clear the foreclosure backlog in a given state at that state’s current foreclosure rate; red are selected non judicial states; blue are judicial states; you can see that at the current rate, it would take 709 months to finish the foreclosure process in new york, and 669 months to clear new jersey…in other words, both states have a foreclosure backlog of more than 50 years…

    so at this rate, we’ll all be dead before the shadow inventory clears..

    1. Julian

      You’re spot on, man. 30s and 60s are not likely to wind up in shadow (though it is important to look at the “roll rates” – the rate at which loans are rolling from 30 into 60, 60 into 90, 90 into foreclosure – just FYI, in their last report, LPS actually reported that loans were rolling back from foreclosure into 90+ delinquent status at an all time high).

      A good measure of the shadow is to add the current stock of REO properties to the seriously delinquent loans and those in the foreclosure pipeline. Best estimates have the REO inventory at about 850K right now, so a good estimate of the shadow would be, tops, 4.8M. It’s a scary bloody number, by any measure, but only about half of Michael’s.

      1. Yves Smith Post author

        Mortgage delinquencies are much more likely to wind up as a default than any other type of borrowing, given the fact that it is close to pervasive that servicers don’t tell borrowers they’ve been late, impermissibly apply late fees first, and then put the resulting “short” payment in a suspense account, allowing the charging of even more fees the next month (the next month payment will be “short” which makes it late). I know of one case of a single disputed late fee leading to a foreclosure.

        Borrowers don’t get reports on late fees or other fees charge, they typically find out via a notice of default that they have a problem.

  9. toxymoron

    “Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors”.

    I have been wondering who these “investors” really are. Michael mentions municipalities or pension funds, but afaik they only pour their money in an “investment” that is managed by somebody else.

    Could that somebody else be BofA, Citi, Wells themselves? Could that explain why none of these investors complain?

    1. Yves Smith Post author

      The investors are investors in private label securitizations (subprime and jumbos loans, all the non GSE paper).

      They are afraid to sue the banks. They need them to buy and sell bonds. I had one investor attorney tell me that if Jamie Dimon killed their children, they’d be afraid to report it to the police.

      They also have a collective action problem, for most abuses, you need to get 25% of the investors to sue, and there is no transparent registry, so you have a hell of a time finding people to join you (Greenwich Financial formed an information clearing house to help with this problem).

      1. Ray Phenicie

        Thanks for explaining. Finally, together with Michael’s article and this comment, I have a much better understanding of this. It’s only been two years that I have been following this but hey-Rome in a day and all that.
        I wonder how many people, like the example of the contractor, know what is going on in the mortgage service sewer pits? I stopped reading CNN about three years ago and unplugged the Cable TV the year before that. My sense is that the Main Gutter Media has not come close to covering 1/10 of all that has come across the web pages here at NK. How could they? with most folks pushing the surf channel button every 27.38 seconds?
        Moving along here to the next blog article . . .

  10. Foreclosureblues

    a couple of points (btw really good work mike)

    these are my own conclusions

    1 they powers that be ARE accomplishing exactly what they want

    2 banks do not care whatsoever about balance sheets…it is irrelevant to them…ONLY CURRENT CASH FLOW

    and 3 matt is correct that to stop feeding the machine is the only way to kill it…


  11. Doug Terpstra

    Thank you Michael, for excellent analysis and commentary. Your calculus is very credible, even unassailable … if conservative … and hence very scary.

    Worse, the numbers are just as accessible now to serious analysis (especially to banksters and the Criminal Reserve cartel) as they were during the bubble itself, when real estate prices for years were impossibly outstripping modest overall inflation by a factor of 3:1, and when it was widely reported that 30% of home sales (in Phoenix, higher in Vegas and other areas) were to investors and speculators, not owner-occupants. We’ve been renting for six years now because the subprime bubble was so obvious, even to us as finance-outsiders, and for that reason, it’s hard to escape suspicion once again of a more sinister, malevolent agenda by TPTB, beyond mere unenlightened self-interest. I’m keeping my foil hat on.

    Just one quibble. OpenSecrets.org and The Center for Public Integrity are at odds with the assumption that the moneychangers political bribes are lopsidedly going to Repubs over Dems. Historically, that may may have been true, but it now see-saws like the casino market with recent bribes from Wall Street running about 56-44 in Dems’ favor. (There’s little operational party difference, but Clinton and now Obama have arguably been better for Wall Street than Reagan or either scion of the Bush Dynasty.)


    And from WaPo, Wall Street’s plantation water boy Obama, is now well ahead of the GOP candidates, including Mitt, who it seems is trying to buy the throne with his own money. Government Sacks CEO Bankfiend heavily favors Obama, and he’s a pretty shrewd, “savvy” investor.


    1. JTFaraday

      “at odds with the assumption that the moneychangers political bribes are lopsidedly going to Repubs over Dems. Historically, that may may have been true, but it now see-saws like the casino market with recent bribes from Wall Street running about 56-44 in Dems’ favor.”

      I have a VERY strong gut feeling that the corporatist criminal cabal will be hiding out within the pro-government D-Party, with its base of true believing liberals who are doggedly nostalgic for the New Deal and the Warren Court and who are rabidly opposed to the libertarian anti-government or anti-federal government position(s), for the foreseeable future.

      If I were a totalitarian corporatist that’s what I would do. Eff your individual liberties and eff your “states’ rights.” I want all my ducks chained together in a row.

      Just like in the attorney generals settlement case–who does this Eric Schneiderman think he is anyway?

  12. scraping_by

    Another population in the shadow industry are those houses for sale, but not on the market. That is, no listing, no advertising, no showings, no sign in the yard, nothing. Empty, most of them.

    It’s not yet that houses are too cheap to meter, but reality wouldn’t be very friendly to the current asking prices.

    The supply side of the problem (the demand side has its own aspects) needs clearer thinking. Such as, think of a principal modification as a short sale to the current resident. Not complicated, outside foot dragging.

    1. Ray Phenicie

      This aspect is really well covered over in the ‘nicer’ neighborhoods as the neighbors cut the grass, get the keys from teh mortgage servicer to lower the blinds, turn on the light timers and shovel the walks, park their cars in the drive. The giveaway is when peering into the back yard one can see the neighboring woodlands creeping over the fence; also the blinds stay exactly 3/4 of the way closed for ten days?

    2. Deb

      I LOVE the idea of framing a principal reduction as a short sale to the current resident, that is BRILLIANT! and it makes so much sense, for both parties!

  13. mac

    The part of this issue that hurts us all is the lose of tax revenue to various taxing entities.
    No payments no tax, thus we all are hurt either by higher taxes or lose of services.
    There is also related to this those who bought the phonied up packages of loans, if the jails were not all full the crooks should be in them, except that with lower tax revenue we can’t afford to jail them. Ropes and trees maybe!

  14. Julian

    A couple of points: There’s no ambiguity to LPS’ numbers. They’re talking specifically about active mortgages – loans, not homes – and specifically about first liens, not home equity lines loans or other seconds.

    Secondly, your shadow inventory number is incredibly inflated. As of today there are 6 million loans (give or take) that are non-current, roughly 2 million of which are 30 day delinquencies, the vast majority of which tend to self correct (many people miss one mortgage payment but then get back on track).

    According to LPS reports, the rate/number of new problem loans (those loans that are 90 or more days delinquent now but that were current 6 months ago) is not getting any better, but it’s not getting any worse either. it’s in a state of limbo right now. With 2M loans in the foreclosure pipeline (and sitting there longer and longer every month) and 2M loans (give or take) in that 90+ bucket, you’re looking at about 4M in shadow inventory.

    1. MBS Guy

      Have to disagree with you. I find these numbers credible.

      Olenick defines shadow inventory as all loans delinquent, including those in foreclosure. His number for this is 12.31%. The MBA’s number for the same category is 12.63%. So, while Olenick used a different source for the delinquency data, his number ties out pretty closely to the MBA’s number. Note – the MBA definition of “30 days delinquent” is a loan that is actually 59 days past due, due to reporting lags.

      There are differences of opinion on whether to include 30 day delinquent loans in the shadow inventory category, but he is clear that he is doing so and he provides some decent reasons why it is legitimate to include them. (note – the 60 day delinquent bucket has always been very low historically, so it is pretty much a rounding error, either way).

      In the past, subprime servicers would argue that the 30 day delinquent bucket, which was usually 10% or more (back in the good old days) was “noisy” because these types of borrowers had problems managing debts, and often cured when yelled at by the collections department. In contrast, in prime mortgage land, the 30 day delinquency bucket tended to be much smaller – 2% or so, but was often indicative of a greater likelihood of subsequent default because these borrowers did not typically mis-manage their debts so delinquency was a sign that something was wrong.

      As it turns out, based on the experience of 2006-08, the 30 day bucket for subprime loans was more than just noise – these loans didn’t cure but went straight to default. Prior to the crisis, the cure for most of these 30 day delinquent borrowers was probably a refinance into a new subprime loan with a worse rate. In other words, the borrowers weren’t just being sloppy. Rather, the lenders were playing games with the delinquencies and it didn’t matter so long as there was a new deal to put the delinquent loans into.

      In addition, it was common for subprime servicers to file the notice of default at 90 days past due (just 31 days after the loan is reported as 30 days delinquent) – which seems to indicate, incongruously, a low tolerance for borrowers “mis-managing” their debts. This would tend to inflate the foreclosure numbers.

      Importantly, it was also common subprime servicer practice to treat habitual late payers as only 30 days delinquent. This is known as “rolling delinquency”. The borrower gets 2 payments down and stays at that level. This is a dishonest categorization of the borrower’s status – the delinquency should be aging into more serious delinquency until the borrower becomes current. It was a big deal back in 2006 or so when servicers revealed they were playing this game. I have no doubt they are doing it again. In my view, this type of loan is properly categorized in the shadow inventory figure (and ultimately likely to be foreclosed).

      Finally, Julian’s main issue is with including the “30 day” bucket. In my view, he discredits his argument by saying that these borrowers “typically self correct” – this is the same lie subprime servicers have always used. He (and they) provide no support for this argument, and there are many arguments (as described above) for why this is often not the case.

      Julian’s argument about the number of loans delinquent is also off base, because it misses Michael’s point about the bigger loan data set, based on Census data, against which he applied the delinquency numbers. Olenick’s denominator is much larger than the one used by LPS, and that’s a big reason why the number is much higher.

      Arguments can be made about whether “30 day” delinquent loans will proceed to default or foreclosure or whether the borrower is just being sloppy and will ultimately cure. However, I don’t think Olenick’s numbers are wrong – he spells out how he defines the shadow inventory category and it adds up and generally ties out with the MBA.

      I am more sympathetic with the shadow inventory definition including 30 day delinquent than I am with including current loans that are underwater (the approach used by Goodman).

    2. Michael Olenick

      MBS Guy did a great job of saying pretty much what I would have, especially pointing out that LPS is using the wrong denominator; the census data speaks for itself, and I’ve explained where my figures come from.

      Consider some of the other evidence not in the report but in the figures:
      * Month over month delinquencies, from Oct to Nov, increased by 38 state’s, they were flat in eight state’s, and decreased in only four. CA is the only state in the bucket that saw an improvement, though the change was a .1% decline.
      * There are 14 million vacant properties by the census count. In light of this, it is impossible to believe there are four million total bad loans.
      * Like MBS Guy argued, the key is the higher base the census used. That is the *only* data set we have that is both complete and not subject to industry manipulation; walking door-to-door and asking whether a person owns a house and has a mortgage on it. It’s the only credible count, and it’s much higher than LPS or CoreLogic’s figures.
      * Any of the 30-day figures left over are more than cancelled out by the modification re-defaults that I zero’d out; didn’t count at all, and by ignoring the renters in big buildings, even though I know from living in FL that many of those renters are in things like FL condo towers w/ sky-high default rates from back-yard RE investors caught in the downturn.
      * Finally, besides the Goodman study there’s also the behavior of the Federal Reserve. Yesterday, Bernake announced QE3 aimed squarely at MBS’s, ignoring a letter just one day before from ranking Sen. Chair of the Senate Finance Committee, Sen. Hatch, telling him not to written the day before. Fed. Gov Raskin assailed servicer practices resulting in higher shadow inventory on in a Jan 7th speech, the Fed released their Jan 4th paper, and they also released a Fed-sponsored paper written by the Wharton Chair of Housing about people that move. I don’t have a copy of the paper yet, only a summary, but it apparently also uses the census data to say there has been massive under-counting.

      Besides the raw figures there’s also the anecdotal evidence, which I believe to be compelling, especially in light of behavior by the Fed.

      Finally, LPS doesn’t say where their denominator comes from; they just assert that they know how many active loans there are. But, like CoreLogic, they’re completely conflicted because the lower the figure, the higher their market share appears. We don’t know how many banks are servicing their own loans in-house without LPS’ “help,” and they need that figure to be low. We’ve all seen LPS’ behavior; shouldn’t we assume that some banks didn’t also see it and realize it might be best to keep their default work in-house? Walking door-to-door and asking is the only way to get an accurate count, and that count came in much higher than the other outsourcing companies have been claiming.

      1. Michael Olenick

        Should have said CA is the only state in that bucket that had any substantive housing inventory, not the only state in the bucket (obviously, or there wouldn’t be four). Inventory and delinquency by state, rather than cumulatively, is important; another key area where this study substantively differs from others.

  15. Fiver

    Perhaps you’ve answered your own questions re what the Admin’s policy actually is?

    1) Fed effectively owns a giant GLOP of MBS.

    2) Mass foreclosures, after the November 2010 drubbing the Admin took, are declared too nasty, and visible a political problem to carry into a Presidential election year.

    3) It also suits banks, who revisit their original assessment of the situation, pull a 180, and slow foreclosures to a trickle in order to avoid recording losses by banks – and the Fed.

    4) Let everyone stay where they are as the Fed owns most of it and need not act. It actually helps (rationale) by allowing the owners to spend mortgage dollars into the economy, keeps them out of sight until at least 2013. Take another kick at the housing can then.

    5) Dick around for as long as need be. The Third World Debt Crisis in the ’80’s demolished the solvency of the US banking system and half of Latin America, but note the banks grew to become today’s Behemoths and Latin America paid through the nose (in money and blood) for 2 decades. Extend and pretend can go on for a very long time with successive Governments determined to serve banks. Having long-ago demonstrated that whatever existing laws/rules are quite meaningless, what’s the rush to get all those MBS off the Fed’s balance sheet?

    6) The one thing the Admin can’t do is openly state this is the plan – that these people might well end up living rent-free for years to come, even ending up owning steeply discounted houses, and that banks won’t absorb even pennies on the dollar in losses because of the perceived politics.

    1. F. Beard

      – that these people might well end up living rent-free for years to come, Fiver

      That’s fair. Did the bankers build those houses or did the poulation build their own houses by borrowing their own stolen purchasing power?

      Too bad for non-borrowers though. A universal bailout would fix them too in a straight forward, honest manner.

      1. Fiver

        Perhaps so. But the point was that we are not about to see another banking crisis based on mortgage losses, nor any sort of official bailout. A stealth solution worthy of the Droner in Chief.

  16. madopal

    Hoooly cow. Where to begin. The premise is correct, but:

    “To be conservative—to exclude more loans as commercial than actually are, rather than risk leaving commercial loans in the analysis—I’ve assumed that any building with 5 or more housing units is in a building that either has a commercial loan or no mortgage at all.”

    Ok, that deals out an awful lot of condo buildings that went up in the boom.

    “According to the National Multi-Housing Council, using 2011 Census data, has determined that nationally, 42% of renters live in buildings with 5 or more units. Applying that percentage to the 37.5 million rental units, and subtracting that from total renters, I end up with 21.8 million rental housing units that could have residential mortgages.”

    What are the odds that the outdated Census data about renters percentages were before the condo boom? How many condo owners have been forced to rent in the past 4 years since they’ve been trapped in units?

    One other source for shadow are these owners who are trapped. They’re not delinquent, they’re paying up, but they want out. How many of those would sell if they even saw a glimmer of a chance? How can those not be shadow inventory? If prices even show a hint at edging up enough for them to sell, you can bet there will be a further gang rush to sell.

    All this points to is that the 9.8+ million units is also a pretty large underestimate as well.

  17. albertchampion

    so, can anyone tell me how many residences are owned outright – no mortgages? and how does that compare to the number of those residences “unowned”[i.e., mortgaged]?

  18. Ray Phenicie

    The most amazing thought is that all the people living in non rental units could in theory be in their domicile with no house payment if they so decide. If all 78.6 million mortgaged properties go into default tomorrow what would happen to the economy?
    The reason I’m bringing this up is because the number of folks defaulting is growing and growing. Why should it stop? Why would any sane person, having read this article, continue paying on a mortgage? If Europe coninues to slide into the Mediterranean on the south, into the Atlantic on the west and be overcome by the Black Forest on the East, the U. S will slide into the Rio Grande and we can sing do-dah all day long for a summer outing and return to our mortgage Jubilee homes at the end of next summer.

  19. Jeff

    Since student loans are over a trillion, how about letting students take title to the homes in exchange for paying off their student loans?

    There’s your housing starts, there’s your new houshold’s, there’s your maintenance, there’s your crime prevention. Best of all, it gets them out of Mom’s

  20. Jeff

    Here’s a serious suggestion:
    There is a shortage of community gardens in this country as people who live in apartments and condos want to grow their own food either out of necessity or as recreation.

    Why not allow people to garden in these empty and REO home’s backyards with the “rent” for that being the maintenance of the entire property’s outside, watching the place, doing small repairs etc.

    This would satisfy the urge to garden, save the community money, improve the soil and create some value on the property.

    1. Reverse Engineer

      As most of us are aware, the Great Collapse began essentially with the implosion of the Sub-Prime Mortgage market around 2007 or so. That is what led to the collapse of Bear Stearns, and after that Lehman Brothers. The “solution” to this problem, what has essntially kept the monetary system on Life Support ever since has been the ongoing transfer of all the MBS onto the balance sheet of Da Fed, and by proxy onto the Taxpayer.

      However, in order to keep all these losses from being recognized, over the last 4 years the “Shadow Inventory” of homes in some stage of Foreclosure has been ever increasing in size, you could say Ballooning here really. I’m attaching an article below from Michael Olenick which appeared on Naked Capitalism today which makes some estimates on the level of Shadow Inventory out there, as well as detailing all the obfuscation going on to prevent these losses from being recognized on any Balance sheet. The Banks basically won’t follow through with taking possession of any of these homes, even from people who WANT to be foreclosed on. Reason of course, there essentially is no Market for these homes, really at anything above Detroit level prices in many markets like FL and NV and even CA. We’re not talking even an 80% loss of value, its more like 95%. Just the carrying costs of taking possession until you could sell it for pennies on the dollar are more than the Bank can afford to pay.

      If you follow Michael’s analysis, he comes up with a figure of around 10M McMansions in the Shadow Inventory, but the reality is it is many more than that. If/when at any point these homes did go on the Market for real, it would drive down the prices of all the other homes, putting them underwater and then those Occupants would put them up for sale. So the whole residential market is really just in Limbo-land at the moment.

      There are numerous people now who have been living in their McMansions Rent Free for a few YEARS now. Main problem for them is that even if they WANT to get out from under the McMansion and transfer the Title back to the Bank, they can’t do it. Long as the Property remains in their name, the Bank holds them in Debt Servitude to a now basically worthless piece of Real Estate. Why would the Bank want to take possession of a now WORTHLESS asset with a Non-recourse mortgage? That allows the debtor to ESCAPE from the Debt Servitude.

      This is why Owning Property is such a danger right now. Once it is in your NAME, you cannot get rid of all the OBLIGATIONS the ownership of said property entails, primarily the Property taxes but also all sorts of maintenance issues you can be FINED for if you don’t maintain the property. You know, overgrown lawns at minimum, but also issues like the pipes freezing up and so forth. Then the possibility if you abandon the property it gets taken over by Crack Addicts running a meth lab etc.

      What we are really witnessing is the Death of the Property Ownership model for Individual Housing. From its beginning in the post-WWII era with the “Levittown” suburban tract housing offered up to the returning GIs, this was a Banking Scam designed to indebt a large number of people on a Retail level, which then provided a large pool of Debt Money for these banks to further Lever Up into ever greater financial instruments and schemes. As long as the Ponzi kept GROWING, as long as the Suburban Model kept expanding with new Malls and new Interstate Highways, Property Values kept going up, albeit with a few brief Recessions during periods like the Oil Embargo of the 70s and so forth. The model is no longer supportable, based as it always was on copious amounts of cheap energy, liquid fuels and the Automobile.

      For the most part, 50% and even 80% Haircuts on the “value” of this form of housing are not enough. Its ALL just about entirely WORTHLESS. The Banks don;t WANT this housing BACK in lieu of your Loan, you can’t even send in the Jingle Mail here for Deed in Lieu of foreclosure. Long as the Deed remains in YOUR name, YOU are responsible for all the liabilities of the Property Ownership. Even if you are not paying up on your loan, the Bank can hold it on its books at Par Value and not recognize the loss of value.

      What of the older McHovel Owner of a small house he bought back in the 70s and is fully Paid Off, Free and Clear here of mortgage? Is he OK? Not at all. Many of the other McHovels in his neghborhodd were bought and sold a few times over the last 40 years, and probably half of them in his neghborhood have an Underwater Mortgage on them as a result. Others are inhabited by people who took out HELOCS over the years because their Incomes were not keeping pace with Inflation, and of course also they wanted to enjoy the Big Screen TVs and Hawaii Vacations available to anyone with enough CREDIT to afford them.

      So in your neighborhood, people running short on cash are no longer paying their mortgage, some are evacuating the premises, lawns are overgrowing and your Retirement House is rapidly dropping down into Detroit Value levels. You can’t sell it anymore as your “store of equity” and buy the smaller Condo in FL and then put the rest of the money from the sale into some Stocks and Bonds to live a Comfy Retirement. At this point, your best alternative might be to take out a nice Fire Insurance Policy on the McHovel and Torch It, although one suspects the Insurance Companies are very carefully scrutinizing such convenient Fires and won’t pay off if its deemed an “Arson” by the local Fire Dept. At least though if you Raze the property before abandoning it, you won’t have the issue of it being turned into a Crack House. To avoid the Legal Problems of being fingered for Arson, the better way to go here if you own the property Free & Clear would be to Disassemble it. Far as I know, there are no Laws against taking a McMansion you own Free & Clear, stripping out all the wiring and piping and ripping it up with a Crow Bar and some Power Tools, salvaging such good things as Windows and Door frames and the like. You’ll probably incur some costs here though in trying to dispose of all the Vinyl Siding and Wallboard at the local dump.

      I sure am glad I don’t have any Property in my Name these days. What a fucking HEADACHE! How it will go in the FUTURE here for all the Property Owners is a very difficult question to answer. As more people become UE and fall off the economic cliff, more mortgages will go unpaid. People may stay in these places a while living Rent Free, but really they have to Abandon them eventually to move elsewhere they might have some chance for Employment of some sort. What kind of Housing Market can there be when there are Millions of Overgrown McMansions, and the few people who remain employed are making 3rd World Wages?

      I see many Ghost Towns on the Horizon here. Even the costs of Bulldozing them all as has been suggested already by the Maestro Alan Greenspan likely is Unaffordable. The best I think we can hope for here is that they will eventually be Scavenged out for the worthwhile Materials in them, and pulled along by Oxen to some other location to rebuild more sustainable housing in due time. That’s the GOOD outcome. the BAD outcome? Cue Mad Max here.


      1. TrickleUpPolitics

        The article is VERY interesting and the comments are too. As a homeowner in default, in FL, who bought her first house in 2007, let me add my two cents.

        I moved to FL in Aug 2007 to take a new job and bought my first house, planning that it would be my retirement home once my military pension kicked in. I was notified in Dec 2008 that my contract would not be renewed, so I began spending my mortgage payment on preparation for a job switch and for job search. The economy continued to tank. Although I have been employed my entire life and have a varied background with multiple degrees, I was unable to find ANY job ANYWHERE in the US (my friends say it is age discrimination since I was a female in my late ’50’s; I agree that was a factor.) The Bank filed a foreclosure in Oct 2009 on my house in Lee County, FL, home of the foreclosure courts, but because Freddie Mac fired David Stern, my foreclosure was one of those left in limbo. WHen a new lawyer finally took over, it was too late to save their corrupt case before the foreclosure courts ran out of money. I was successful in obtaining a dismissal on the foreclosure case in Jun 2011. The bank was given 60 days to refile but they have not done so. Just recently I was contacted by a “relationship manager” who told me that all homeowners in default were assigned one in an effort to keep them in their homes (I have the idea this was required by the feds for some offense but, as with everything else the feds do, we little people are not allowed to know the detals). Our “relationship” got off to a bad start when this old man explained to me that he “was raised up in the country where you were expected to keep your side of the bargain”. So, now having called me a deadbeat, he expected me to beg for a modification that would trap me in this home for another 45 years (until I am 105 yoa) with no hope of earning equity because Freddie Mac does not do principal reduction.
        I told him he was making a moral argument on behalf of the bank when I and the bank were basing our decisions on finances. I owe $208,000 on a home that is now appraised for $70,000. Am I one of the idiots who will continue paying for this house? NO I AM NOT. Will I continue to live in this house rent free until the foreclosure is resolved? Yes. Do I feel guilty about it? No. Why not? Because I know about the chicanery Freddie Mac and Fannie Mae engaged in by hiding from me the actual owner of my loan. Freddie Mac told me when I called that “even if we sold your loan we still own your loan”. HUH? Also, take a look at the servicing guidelines FM uses (it’s online) and the trust agreement FM uses for MBS: it becomes the seller, trustee and the administrator. It’s on both sides of the deal. Although it chose NY trust law as the controlling law, the bank has failed to answer my discovery request for the tracking documents showing the actual physical delivery of my note to the trust as required by NY law. In fact, acc to the servicing guidelines, FM requires the servicer bank (in my case the servicer bank is also the entity that sold my loan to FM) to retain the note and forbids it from executing an assignment until after the house is sold so that the proceeds can be funneled to FM. Open fraud if you ask me.

        In the meantime, I had an interesting sales call from a new company formed to do investigations for homeowners defending foreclosures. The guy told me that he filed a quiet title action on his own home and served FM. FM removed the case from state court to federal court and then filed an answer denying that it owned the house. The bank defaulted by never filing an answer. I think that FM would rather write off his house by denying it owns the house than allow even one court to order it to disclose to whom it sold that loan and produce the paper trail. This confirms my plan to file a counterclaim/quiet title in my own case if the bank ever decides to refile the foreclosure.

        In the meantime, I will be working the crappy little job I have now where instead of making 60K a year I make 15K a year while banking my military pension. I plan to move to TX where there has been no housing crash since the banks there have non judicial foreclosures and did few loans of 0% down. I wanted to buy a new house there to accommodate my three dogs, however, after reading this article, I may be spending years here in Florida in this house because only idiots will plan to buy now.

        I thought you would be interested in a snapshot of how this mess is affecting the financial decision of one “homeowner”; who has followed the legal and political wrangling very closely during my own travail in order to use it to my own financial advantage. I think that is all that remains to us little people until the judicial system respects the rule of law and property rights, and the banks/feds who created a MERS system outside of the UCC and state law to frustrate any hope we little people have of actually exercising our rights with full disclosure on both sides get their comeuppance. This will not end well for our country.

        P.S. The occupy movement and its sympathizers as well as the author seems to believe the BS about Wall Street favoring those rich Republicans. Use some of that brainpower and research that issue. Wall Street bought the Dems long ago, and when it did so it expects the Dem Party to remain bought. That includes Obama. It especially includes Obama. Otherwise you are closing your eyes to his plan to raise one BILLION dollars for his reelection bid by beginning with Wall Street cash. I say a pox on all their houses.

        1. Deb

          thank you for sharing your story trickle…you’re a smart person, you’ve got it all figured out, and i wish you the best

        2. Carla

          You are absolutely right, Wall Street bought the Dems ages ago and Obama before he became prez…However, Wall Street IS all about the rich, whatever flavor of Republicrat they may be.

          And Occupy to date has not sold out. We are the 99%.

          Thanks for sharing your story. I’m sitting in a house that was paid off about 10 years ago. It was worth 4-5 times as much when I made the last mortgage payment as it is now. So much for the “biggest single investment” most of us were ever able to make.

  21. ron

    The key to understanding the oversized numbers of mortgage distress is to realize that the housing bubble was a credit event and the vast numbers of underwater mortgage holders today didn’t buy a house during the bubble they did cash out refi based on unrealistic housing valuations.

    The mortgage foreclosure system was never created to handle the vast numbers that have entered the system and are awaiting some level of disposition today. What makes the current problem so difficult to deal with is that the current population of underwater mortgage holders have little in common other then the house is over valued relative to there mortgage. Some are unemployed,some purchased during the bubble,some did a cash out refi, some are divorce, some are death in the family, some have medical hardships, some have good jobs and its on a national basis so the numbers have overwhelmed all existing methods for handling distressed mortgage holders.

    Mark Hanson has noted and I have posted that the majority of these mortgage holders have DTC levels exceeding 50% and that giving up the mortgage payment becomes the preferred method of dealing with there income shortfall. Mark Hanson has also noted that these people need more then just mortgage relief but need overall debt relief.


  22. Eleanor

    I was amazed by the figure of 17.2 million units vacant. That’s something like 12% of the total. A lot of empty houses, which quickly deteriorate, are stripped, are used as squats.

    1. Pearl

      Great piece, Michael!

      I don’t know much about FL real estate, but I did a quick Zillow of some “beach” properties. I randomly chose Cocoa Beach, because it sounds delicious.

      Imagine your next door neighbor listing his home for 75% less than he paid for it in 2005. (I can’t imagine what a realistic default rate would look like in such a condo complex.)

      Purchased in 2005 for 208,000, now listed at Zillow for $55,000:


      Just think of the folks living in this complex who are NOT in default–how fast would they run to dump these suckers the very minute prices edged upward? It’s like the “shadow inventory” has its own “shadow inventory,” no?

      Seems to me it will take a few more years before real estate prices in such areas find a bottom….

  23. ambrit

    As Mz Elanor just above mentions, the figure of 17.2 million vacant units is daunting. Where we live, Hattiesburg Missipppi, the local city authority is engaging a scheme to do slow but steady demolitions of “sub-standard” housing units. Finding those units around here isn’t too hard. Finding the maintained but empty units is somewhat more dificult. Across the street from where we live, an older (1940’s) subdivision, the house is owned by a couple now living in Arkansas for work reasons. They appear every few months to do basic upkeep. A lawn service does the yard. Lights in the house are on timers to maintain the illusion of occupancy. As long as the taxes are paid, (and valuations have already taken a hit around here,) who’s to know what’s what?
    The idea of turning some of these units into “squats” isn’t such a bad idea. The alternative appears to be Anacosta Flats, and our beloved esteemed Leader doesn’t seem to be short of McArthurs, Pattons and Eisenhowers to carry out the dirty work if needed. Some State sponsered form of Squatters Rights would be an equitable and socially responsible response to the looming crisis. Otherwise, all bets, especially those made on Wall Street, are off.

  24. robert

    great but sad piece and like the idea of trickle up. The bottom line is that millions of home buyers were, using math like above, simply ripped off (see “equity stripping” through loan to own) and have no/little recourse. I too bought first home on 2007 (older, new family, fixed 50% downpayment). At the time, I calculated that prices were 30-40% overpriced relative to rent. I did not know why but I had faith that regulators would be on top of the situation because a 30% drop in home prices would be catastrophic for banks, lending, and the economy. I was wrong about the regulators and people, in general. Those who bought in 2002-07 would have never known why prices were so high because bank underwriting “standards” are not disclosed. Why were prices high? “lax underwriting” according to most and the Fed. Lets try 10% or no money down with teaser rate, using backward looking consumer FICO scores, and not fully indexing. Effectively it was underwriting a 30-year zero coupon mortgage using 1-2 year of credit risk based solely on home prices and revolving credit (FICO)and not affordability. This is SOOOOOOO dumb, illegal, and outlandish I dont know where to begin. Five OCC guidances( and numerous other reg docs) addressed the issue between 2002-2006 strictly but regulated banks did it anyway. Regulators simply let it happen. So now you have a huge (30-year) mortgage balance that was underwritten to be serviced for less than 6-years at most. Insane. HAMP, HARP, etc are a sad joke drummed up by ex-Fed (non-regulator) Geithner and his banker pals. They know that the only – and indeed the right way- to deal with this mess they created is principle writedown but that would effect bonuses. It is sickening.

  25. robert

    OCC Advisory Letter on Predatory Lending
    February 21, 2003
    AL 2003-2 OCC Advisory Letter
    Guidelines for National Banks to Guard Against Predatory and Abusive Lending Practices
    The terms “abusive lending” or “predatory lending” are most frequently defined by reference to a variety of lending practices.[5] Although it is generally necessary to consider the totality of the circumstances to assess whether a loan is predatory, a fundamental characteristic of predatory lending is the aggressive marketing of credit to prospective borrowers who simply cannot afford the credit on the terms being offered. Typically, such credit is underwritten predominantly on the basis of the liquidation value of the collateral, without regard to the borrower’s ability to service and repay the loan according to its terms absent resorting to that collateral. This abusive practice leads to “equity stripping.” When a loan has been made based on the foreclosure value of the collateral, rather than on a determination that the borrower has the capacity to make the scheduled payments under the terms of the loan, based on the borrower’s current and expected income, current obligations, employment status, and other relevant financial resources, the lender is effectively counting on its ability to seize the borrower’s equity in the collateral to satisfy the obligation and to recover the typically high fees associated with such credit. Not surprisingly, such credits experience foreclosure rates higher than the norm.

    National banks are subject to section 5 of the FTC Act, which makes unlawful “unfair or deceptive acts or practices” in commerce.[10] The OCC has the authority to enforce section 5 with respect to national banks and to impose sanctions for violations in individual cases.

  26. gmathol

    We don’t here much in main stream media about MFglobal – a company which defrauded their customer by helping themselves to segregated accounts, in order to cover risky investments/bets.

  27. Jack Parsons

    On Jubilee: y’know what? The CDS market just had one. When Greek debt refinanced at 50% of face value, and CDSs did not trigger, that was a Jubilee. For someone, but not me or thee.

  28. Howard T. Lewis III

    This is why congress declared martial law and a repeal of the Bill of rights. They did not lift a finger to build any of those 9.8 million homes and they stole each and every one with phony money printed up by their buddies at the Fed.I have stayed out of the corrupt system and would not cry if the hard working and honest people who lost thousands of dollars of equity started picking these crooked bankers off like dump rats.

  29. Kurt Anderson

    Thank you Michael, great article! Another dark shadow, is that unemployment, divorce and illness have traditionally been the cause of foreclosure, not banking dysfunction. In the past 2 years FHA purchase mortgage share has risen from 4% to 30%, contributing to the so called real estate recovery, historically FHA default rate is around 9% even during a good economy. FHA projects they will be paying out on 1 in 4 homes purchased in 2007-8 and we will begin to see a whole new wave of foreclosures. Also, the recent Federal Reserve white paper is making big news with the REO to rent scheme. With a $50 million minimum purchase with competitive bulk pricing, the so called loan balance reduction will soon be the next MBS play.

  30. Rob

    Very good analysis. However, there is another component of shadow inventory not mentioned or included in the analysis. It is a more common source of inventory even in relatively good times although it is more difficult to calculate. This component includes homeowners (possibly many) who would like to sell their home, but won’t sell because they don’t want to loose money (or face (ego)). They may or may not be behind on their mortgage payments and they may or may not be underwater on their mortgage. This group is most likely composed of people whose mortgage balance + equity (if any) is +5% to -5% above or below market value of their house. They would like to sell their home for any number of reasons (e.g., retirement, new employment opportunity, etc.), but have emotional resistance to selling for a loss or for breakeven. Industry research shows that homeowners begin to seriously consider walking away from their mortgage & house when they are 8% underwater. Thus the cohort above is on the cusp of default (foreclosure or elective)and is simiply not selling and paying their mortgage until (they hope) the value of their home rises to an acceptable value for them. Since this event may not occur for a long time, some of this cohort will eventually succomb to necessity and sell in order to move on with their lives, take any cash that may be available (if there is equity remaining in the house), lose the house to foreclosure or just keep hanging on and “hoping” for better times. Given the already high “shadow” inventory discussed in the article plus high unemployment in a weak economy, negative demographic trends adversely affecting house buying demand and family foremation, competition from less expensive rental options this other source of shadow inventory is worth adding to the analysis.

  31. Don S

    Excellent article! You hit the problem square on the head. The guys in DC are giving away money. You say that a mortgage write down hurts everyone, but I don’t see how it differs from a bankster bailout. Other than supporting the obvious corruption that free money propagates.

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