‘Shadow’ Foreclosure Inventory is the 800 lb Gorilla

Dennis Norman

For way too long I’ve been writing about record, or near- record, levels of foreclosures and mortgage delinquencies. My ongoing concern about this, in terms of the housing market, is that I just don’t see how we are going to have a sustainable recovery of the housing market while we have 1 in 8 homeowners with a mortgage in the U.S. currently either delinquent on their mortgage or in some stage of the foreclosure process.

Lately there has appeared to be some leveling off of mortgage delinquencies and foreclosure growth is at a slowing rate, both of which are good things. Earlier this week I wrote about a report that came out from LPS Applied Analytics, one of the largest mortgage servicers in the U.S., that discussed the mortgage delinquency rate for May. This morning I was giving more thought to something in the report that I saw the other day but it didn’t hit me at the time but now I realize it is potentially the 800 lb gorilla in the room.

According to the report, the average number of days for a loan to move from 30 days delinquent to foreclosure sale has been steadily increasing and is now at an all-time high of 449 days. So, if you add the initial delinquency, that means on average 479 days lapse from the time a borrower misses a payment until they are foreclosed on. While I love the amount of time the struggling homeowner has to stay in their home before losing it, it concerns me greatly that it is taking about 16 months for the lender to complete a foreclosure, and that this is a record high amount of time. What that tells me is, for one reason or another, lenders are stalling and slowing the foreclosure process so any encouragement we have seen of late in this area may be “artificially created” as the result of lenders reluctance to foreclose rather than a result of the housing market and economy actually improving.

The problem is the lenders can’t put off the inevitable forever…at some point they are going to have to pick up the pace and start foreclosing on loans rather than stalling and that I’m afraid is going to keep the foreclosure rates at levels that will negatively impact the housing market.

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