The Many Faces of Shadow Inventory

After the last entry on foreclosure activity, a couple of readers sent in articles with more data relevant to the topic of “shadow inventory.”

A commenter at my own site linked to a May Union-Tribune article about mortgage delinquencies.  Delinquencies are defined as mortgages on which payments are late by a certain number of days (60 in this case).  The reason this figure is interesting is that it captures all currently troubled mortgages, not just those that have been served with Notices of Default.  So delinquencies are a more inclusive measure of potential shadow inventory.

According to the Union-Tribune article, at least 9.4 percent of San Diego mortgages were delinquent as of the first quarter.  I say “at least” because two different outfits estimated delinquencies, and 9.4 percent was the low number.  The higher number was 11.9 percent.

That’s 9.4 percent (or 11.9 percent) of all San Diego mortgages.  That makes for a very large number of people who aren’t making payments on their home loans — and a very large question about how many of the homes involved will eventually hit the market as must-sell inventory.

Then there’s the issue of mortgages that aren’t yet delinquent but are at risk of becoming so in the future.  This includes one category of mortgages we’ve discussed often before — those whose payments are set to rise sharply at some point in the future.  It also apparently includes many participants in government loan modification programs.  According to a Wall Street Journal article sent to me by local finance professor and occasional voiceofsandiego.org contributor Leonard Baron, the majority of participants in the Home Affordable Modification Program are expected to end up defaulting on their new mortgages.  So even many of those who are getting out of the delinquent category via loan modifications may end up right back in it down the road.

With lenders slow to foreclose on delinquent borrowers and government programs delaying things further still, it is difficult know how quickly that shadow inventory might manifest itself as actual inventory for sale.  But barring large increases in the scope and effectiveness of the government’s housing bailout programs, it seems likely that this inventory will evenutally have to be disposed of in the open market.

— RICH TOSCANO