Shadow Inventory and the Foreclosure Process in Virginia vs Maryland

The Washington Post had a few good articles this weekend about battling foreclosure. One article, in particular, highlighted the differences in approach by Virginia and Maryland. Starting in 2008, Maryland lawmakers passed laws to give homeowners more time to try to work out solutions with lenders; these measures included waiting periods, counseling, and required mediation. These laws, combined with the fact that Maryland is a judicial foreclosure state, slows down the process.  While this is great news for the people being foreclosed on, it often just delays the inevitable, and has affected Maryland’s real estate recovery. According to the article, Maryland ranks as #4 for longest duration of a foreclosure, with average days of 634. Virginia, on the other hand, is a non-judicial foreclosure state, which results in very fast foreclosures, averaging 132 days, the 4th fastest in the nation. (The U.S. average is 348 days.) Virginia can foreclose so quickly because at settlement, home buyers sign a deed of trust that allows the lender to foreclose outside of the court system.

I’m often asked by potential home buyers whether we can expect a wave of foreclosures and how to take shadow inventory into account. The foreclosure process in Virginia provides high visibility into the shadow inventory; one need only look at the publicly filed notices of default, and if the home owner doesn’t work out a deal with the lender, it will become real estate owned by the bank. At that time the tax record will reflect the change in ownership and you can be sure the bank will be trying to sell that home at some point. The timing remains an issue; banks don’t want to flood the market with foreclosures, thereby depressing all prices.

In Maryland, homeowners could stay in their homes for many months, or even years, before that home becomes real estate owned. They could well resume making payment or complete a successful short sale within that time. Notices of default are still used but the foreclosure process itself will likely take more than a year, providing a number of options (not to mention rent- and mortgage-free living) for home owners.

The bottom line for home buyers? Virginia pulls off the band aid quickly, resulting in short term pain to the market, but the end will arrive more quickly. Maryland slows down the process hoping that home owners will find a solution or otherwise resume making payments. We can expect a much slower rebound there. So when someone asks me: “Are we at the bottom?” I must reply with the question: “In which state?”

More Resources: Mortgage Bankers Association “Judicial Versus Non-Judicial Foreclosure”


Washington, DC, Delinquencies and Shadow Inventory

The Mortgage Banker’s Association reported that the seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties fell to 7.99% in the third quarter of 2011, the lowest level recorded since the fourth quarter of 2008. While any decrease is good news, don’t get too excited just yet– it’s a decrease of just 45 basis points.

The delinquency rate is an important one to follow because it’s one of the best leading indicators we have for predicting ‘shadow inventory.’  Shadow inventory is the elusive backlog of future foreclosures–that is, homeowners who are inevitably headed towards foreclosure but the paperwork is still going through so the bank has yet to take possession of the house and/or list it for sale.  Foreclosure processes vary widely state to state, and it’s notoriously difficult to predict when a property will actually hit the market.  Buyers and market bears are always shouting about the huge backlog of inventory coming down the road, dooming recovery progress in the shaky housing markets.  Yet here in the DC area we have been waiting years for this alleged ‘tidal wave.’

I wouldn’t hold your breath.  First, these delinquency stats have been relatively stable for years, and we haven’t seen the big bump in foreclosures yet in our area–the fact is that our local market (particularly close in Northern Virginia and DC) has remained strong enough to absorb foreclosures and short sales as they come to market.  Second, remember that banks control the inventory they take possession of, and they are well aware of the laws of supply and demand.  If a bank is trying to recoup as much value as possible, why would they flood the market with inventory, thereby depressing prices?  The carrying cost of a property for a bank is minimal–after all, they don’t pay themselves a mortgage–so the only real incentive for them to get properties off the books is regulatory requirements that affect the amount they have to hold in reserves.  So it’s a big of a juggling act for banks.

Delinquencies, of course, are tied to unemployment rates: no job = can’t pay the mortgage = delinquency.  DC’s strong job market is another reason we don’t see the avalanche here that other parts of the country might experience.  But stay tuned…the lack of a budget deal from the super committee could mean serious cuts in government spending in our local market.