'Shadow' Foreclosures Could Saturate Housing Market

   

Posted: Oct 23, 2009

A recent report from Amherst Securities Group could be good news for home buyers, assuming they have the wherewithal and personal finances to back up their search. But for the rest of the economy, the report indicates that the housing market may be in for still more of a shock in the coming months. 

According to Amherst, as many as 7 million pending foreclosures could flood the market in the near future, driving housing prices down. That number represents homes that have already been repossessed by lenders or are in serious danger of defaulting. By comparison, 1.27 million homes were in the same financial hot water in 2005.

The 7 million units represent 135 percent worth of an entire year of existing home sales, which are pegged at 5.2 million, Amherst noted.

"We are concerned that, in light of this overhang, the housing market stabilization is temporary, based on seasonal factors, and that prices can deteriorate further," the group noted in its report. "We believe a more permanent stabilization must await some resolution of the shadow inventory."

The group notes that the causes for the "shadow" on the market are threefold. First, default rates on mortgages are high. Second, cure rates - or the number of home loans that return to being current - have also fallen. And finally, the amount of time it takes for a home to go from foreclosure to liquidation has increased.

In other words, a large number of mortgages are backed up in the process of being foreclosed.

Some of the delays in liquidation can be accounted for by actions by state and federal governments. Laws enacted by states like Connecticut have delayed foreclosures, and the federal Home Affordable Modification Program has also given some borrowers extra breathing room.

However, Amherst believes that the relief is temporary. Assuming that 85 percent of the 7 million homes qualify for the government's program, and that 50 percent of those are reached by mortgage lenders, 50 percent of those provide the proper documents, and 75 percent of those get modified, a little more than 1 million mortgages would be saved.

"And many of these borrowers would default later, if they remain in a negative equity position," the report stated.

For those who are in market for home buying, the potential of 7 million mortgages flooding the market could mean a further drop in home prices. If that happens, current homeowners will find it that much more difficult to sell their homes at an acceptable price.