Home Foreclosure News: “Shadow Inventory” Helping Struggling Homeowners Stay Out of Foreclosure?

In spite of some good news on the home foreclosure front, it always seems that once you start to dig deeper, there’s always another hurdle to the housing market being able to get on solid ground; ie, on the road to recovery.

The latest threat to a housing market recovery is shadow inventory. What is it, and how can it benefit you if you want to prevent foreclosure?

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Home Foreclosure News: “Shadow Inventory” Explained

Shadow inventory are properties that have either been already repossessed by lenders, or are so seriously delinquent that they are on the brink of foreclosure. And, according to a report on CNN Money, there are some 2.1 million of these in existence. And, once they hit the market, it’s not going to be pretty.

Why/How Shadow Inventory Hurts the Housing Market Recovery

In order to understand how these types of properties hurt the housing market recovery, you must first understand how shadow inventory comes about. As we discussed in this article back in February about banks purposely NOT foreclosing on homeowners:

By holding off on foreclosure, lenders allow home prices to recover to some degree. But it’s a “faux housing recovery” — at best. Lenders do this because so many homeowners are underwater. They lose when this happens because it’s more likely that a struggling homeowner will walk away from the property (ie, do the jingle mail walk). Or, they may do a short sale or file for bankruptcy. All of this hurts a lender’s bottom line.

This is just one reason. Others are that banks don’t want to write down principles on mortgages; they want to take losses in small doses; they want to avoid being responsible for properties they can’t manage; etc.

Whatever the reason, shadow inventory hurts the housing market recovery because:

(i) It stockpiles inventory: According the the CNN Money article, Houses-for-sale measure lifted by foreclosures:

. . . there were 2.1 million homes either in this officially uncounted inventory as of the end of August. That grew from 1.9 million units 12 months earlier. The potential extra supply raises the risk of further home price declines . . .

This is a simple case of supply and demand. If there is a glut of homes on the market for potential buyers to choose from, it depresses prices overall.

(ii) It keeps homeowners stuck: This piggybacks on the last point. When there are a glut of homes on the market, existing homeowners who may want/need to sell have a harder time doing so. This means they can’t get on with their lives. In the case of homeowners who need to sell, it may mean eventual foreclosure as they run out of money to pay the mortgage. And, if they can’t sell, then foreclosure becomes their only option.

Shadow Inventory: Good News for Homeowners Who Want to Stop Foreclosure?

One bright side for struggling homeowners is that shadow inventory means that a lot of banks are holding off on foreclosure, and even working with homeowners who are severely behind on their mortgages (ie, 90 days or more late). As The Washington Post article, Not Paying the Mortgage, Yet Stuck With the Keys, states:

More than ever, foreclosure has become an unattractive outcome for lenders. . . . For some homeowners, the foreclosure delays have provided needed breathing room to try to save their home, giving them a chance to live for free for a while or to work out a deal to save their property.

Can Shadow Inventory Help You Save Your Home/Stop Foreclosure?

So if you’re trying to stop foreclosure and are severely behind on your mortgage, all hope is not lost. Call your lender; try to negotiate.

Lenders are more willing than ever to work with homeowners who are having trouble paying their mortgage because if they foreclose, your home becomes their headache (eg, maintaing the property, keeping it secure from vandals/vagrants, paying the property taxes, HOA dues, etc.).

As banks are in the business of lending money (not real estate/property preservation), you may be pleasantly surprised at the results you can get with some persistence.

Read more on Shadow Inventory in the Following Articles

Shadow Inventory of Homes Rising

Banks are dragging out the foreclosure process for their own selfish reasons

Email from a reader, on not being foreclosed on

Learn much about shadow inventory in the video below.

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