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Sunday, October 16, 2011

Shadow Inventory Threatens Housing Double-Dip

The major news media is noticing that hopes of a housing price recovery are seriously threatened by a huge shadow inventory of homes whose owners are either waiting for a price rebound or, more likely, are ready to capitulate and accept anything they can get.

However, there is more ominous news.  In a development that will make responsible, bill-paying homeowners boil with fury, many lenders are allowing delinquent homeowners to stay in their homes without paying.  Consider the following excerpt from the Miami Herald report:
"Lenders are basically letting delinquent homeowners stay in their homes as a lesser-of-two-evils option. Foreclosing more quickly would mean more empty homes and additional maintenance costs for banks to shoulder. Lenders, already dealing with a mountain of paperwork challenges for homes currently in foreclosure, would only be adding to their documentation woes by speeding up new filings."
If you are paying -- or struggling to pay -- your substantial mortgage payment, how does the foregoing make you feel?

There is a contradiction in bank behavior. On the one hand, the banks generally plead for mercy, whether from Dodd-Frank or the shorts in the stock market; on the other hand, the banks are allowing legions of debtors -- homeowners not paying their mortgages -- to stay penalty-free in their homes without paying.  

The moral hazard is obvious.  And huge.

The overhang of inventory indicates that there is a large number of homeowners who are waiting to list their homes.

More ominously, it suggests there are many more homeowners who are thinking of strategically defaulting, as the evidence of long delays in foreclosures mounts.

Here's the central question for bankers and for our Congress:  Why should any homeowner pay his or her mortgage, when he or she now knows that neighbors are living for free, willingly defaulting, not out of hardship and for extended or semi-permanent periods, while banks dither, delay or altogether decide not to pursue foreclosure?

Now here is an issue the Occupy Wall Street protestors should take up.

Eric Dixon is a New York lawyer.


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