Shadow housing inventory still looming

Renae Merle at the Washington Post throws cold water on the idea that the "nascent" economic recovery (is anyone still calling it that?) will continue much longer in this story about a subject that seems to slip further and further from the top of everyone's list of concerns - the growing backlog of foreclosures or soon-to-be foreclosures.

The housing market is facing swelling ranks of homeowners who are seriously delinquent but have yet to lose their homes, and this is threatening a new wave of foreclosures that could hit just as the real estate market has begun to stabilize.

About 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale. Some economists project it could take nearly three years before all these homes have been put on the market and purchased by new owners. And the number of pending foreclosures could grow much bigger over the coming year as more distressed borrowers become delinquent and then, if they can't obtain mortgage relief, wade through the foreclosure process, which often takes more than a year to complete.

As these foreclosed properties add to the supply of homes for sale, they could undercut housing prices, which have increased modestly through December, according to the most recent figures in the S&P/Case-Shiller home prices index. That rise partly reflected a slowdown in the flow of foreclosed homes onto the market.

As someone who is planning to buy a house later this year, the idea of stretching out this entire process for years is appalling - not only for how it affects our buying plans, but because it virtually assures a lost decade ahead for the U.S. economy.

It's as if "extend and pretend" is now the national pastime - banks do it with how they value mortgages and property now on their books, delinquent homeowners do it by staying in their home for a year or more without making payments, and the U.S. government does it by introducing huge delays via their largely unsuccessful mortgage modification progam.

Thanks to the helpful hand of Washingon, maybe banks won't have a lost decade, but the rest of us probably will.

The rate at which J.P. Morgan Chase seized properties, for example, peaked in the middle of 2008 and fell steadily last year, according to a February investor report. But the bank expects repossessions to increase this year, nearly doubling to 45,000 by the fourth quarter.

"Some of the positive housing data may not be signaling a true turning point, as many servicers are holding back on foreclosures and the related houses are not yet being offered for sale," said Diane Westerback, a managing director at Standard & Poor's. Westerback said it could take 33 months to clear the backlog.

Data released Thursday by RealtyTrac illustrate the dynamic. While banks repossessed fewer homes in February than a month earlier, borrowers continued to fall behind on their payments, adding to the inventory of properties headed toward foreclosure that have yet to be put on the market, said Daren Blomquist, RealtyTrac's spokesman.

"Just looking at the numbers, we would expect there to be a bigger percentage of properties" repossessed by banks by now, he said.

This "shadow market" reflects the increasing lag between defaults and foreclosures. Many lenders are struggling to keep up with the overwhelming number of borrowers who can't make their payments, and they're reluctant to rush repossessed homes onto the market when prices are depressed.

There's lots more in this report, not much of good for anyone other than loan servicers who, somehow, continue to make money these days.

It will be interesting to see what happens in the months ahead as the homebuyer tax credit expires and mortgage rates start heading back up because, if there is one thing we all learned last year, Americans still respond to good deals, whether it's $8,000 to buy a house or $4,500 to buy a new car.

The big question is what happens when those carrots are removed.