"Shadow Inventory"

Just to be clear the term “Shadow Inventory” refers to houses that have not been foreclosed on yet, but likely will in the near future. For instance perhaps home owners who are behind on the payments and lenders are waiting to take action for some reason? Thats the basic idea correct?

Why are lenders waiting to take action? Are there any additional examples you guys can think of?

Shadow inventory are houses that are forclosed on and are now owned by the banks but not put on the market to sell yet. What the banks do is hold them off because if they put them all on the market it will drive down the overall market prices. They want to feather them into the system gradually so that it keeps the home values up longer.

Shadow inventory will have a big impact on market in 2012. Short sales and distressed inventory will come online slowly throughout the year.

The reason I heard for shadow inventory is that banks take the loss on a property over time, and then they charge it off. If they sold it right after the foreclosure then the bank would take the difference between the mortgage balance (that is what the bank usually buys the house back for at the foreclosure auction) and the sale price as a loss all at once. By slowly writing down the value of the property on thier accounting books over time, the loss looks better on their books.

I thought it made sense when I heard it, and sounded like a more likely reason than the banks trying to preserve housing prices (that reason would make just as much sense but would require banks to be a lot more responsible, foward-thinking, and community oriented than they have demonstrated to date). Taking the loss over time sounds a lot more self-serving and more inline with what you would expect from a bank.

There would be less foreclosure if the banks would only lend to Tier 1 customers.