Shadow Inventory Could Force a Housing-Market Collapse

For more than 3 years, I have provided compelling evidence that all the talk about a housing recovery is nonsensical. I have shown that the Case-Shiller Index is built on questionable assumptions and gives much greater weight to certain kinds of home sales, which distorts the raw data beyond recognition.

I have also explained why median sale prices are useless when the banks have sharply reduced the number of lower-priced foreclosed properties they put on the market.

The most important factor you need to consider now is the "shadow inventory." It is very real and comprised mainly of seriously delinquent properties not yet foreclosed. The problem has always been how can we find reliable numbers.

For nearly 2 years, I have published several articles with the most reliable statistics in the entire nation. In that case, please take a look at these surprising numbers obtained from a very reliable contact at the New York State Division of Banking. They show the cumulative totals for pre-foreclosure notices sent to delinquent borrowers in New York City and Long Island.

These figures need to be carefully explained. A 2009 New York State statute required all mortgage servicers to send a pre-foreclosure notice to all delinquent borrowers. The law did not compel servicers to send notices to delinquent owners of investment properties.

I have been assured by both my data source at the Division of Banking and by the most reputable foreclosure attorney in New York State that there are hardly any duplicates in these numbers. My contact at the Division of Banking is confident that there were no more than 3% which were duplicate addresses.

The table shows that there have been a cumulative total of 551,000 pre-foreclosure notices sent to delinquent owner-occupants just in NYC, and the two counties of Long Island - Nassau and Suffolk.

I have fairly reliable figures from the Federal Reserve Bank of New York on the number of first mortgages outstanding in both NYC and Long Island. Using them, I calculated that the latest figures from the NYS Division of Banking indicate that roughly 30% of all owner-occupied properties in New York City are now seriously delinquent. For Long Island, it is an incredible 35%. These percentages would be much higher if investor-owned properties had been included.

The percentages are so outrageously high that most of you will find them hard to believe. I understand your skepticism. I also found them astounding.

Here is a question I am asked all the time: How do you know that nearly all of these delinquent properties are still delinquent? Haven't many of these owners either become current in their mortgage payment, or foreclosed on?

Those are good questions. Had the banks been foreclosing in the NYC metro, then the total number still delinquent would certainly be much lower than the Division of Banking figures. But the banks are not foreclosing in the NYC metro. I have shown this in numerous articles.

There are reliable figures from Foreclosure.com on foreclosed properties (REOs) for sale. The borough of Queens has roughly 2.2 million residents. On June 27, 2013, there were a total of 114 foreclosed and repossessed properties actively listed for sale. That's right - only 114. By way of contrast, there were 2,249 foreclosed properties for sale in the city of Chicago on the same day.

Think about this -- Although more than 110,000 pre-foreclosure notices have been sent to delinquent owners in Queens since early 2010, only 114 foreclosed properties are now on the active MLS. Excluding those who have received a mortgage modification, the overwhelming majority of the remaining properties are still delinquent.

Many of these owners stopped paying their mortgage more than two years ago yet continue to live in their home. Why pay? They know that the servicing bank may not foreclose and evict them for years.

If you believe that this is taking place only in the NYC metro area, you are mistaken. I just received very reliable figures from Woodstock Institute for the greater Chicago metro area. They reported that since 2008, more than 338,000 default notices (NODs) have been filed in the six-county Chicago metro. Yet only 136,800 of these properties have been sold at a foreclosure auction. This means that more than 200,000 defaulted mortgages have not been foreclosed by servicers.

Yes ... some have been modified and others sold in a short sale. But I have published solid statistics in several articles that more than half of all modified mortgages eventually re-default. We also have reliable figures showing that the banks have sharply curtailed short sales in the last year. So I am confident that somewhere between 100,000 and 175,000 defaulted properties in the Chicago metro area are still delinquent and have not been foreclosed by the banks. This does not include those properties which are seriously delinquent, but have not even been put into formal default by the servicer.

What this means is that the Greater Chicago metro looks rather similar to the shocking situation in NYC and Long Island. Here is my simple conclusion: When the banks finally begin to take action on these delinquent owners in the NYC and Chicago metro areas, home prices will start to collapse.

Is this situation also prevalent in other major metros? I'm working on that. Stay tuned.