If you have listened to the news recently, you may have noticed lots of talk about how current foreclosure filings are declining. The Associated Press recently said zero cities in Florida made the top 20 for foreclosure filings in the nation. That’s great news right? Not so fast!
On the surface, yes, this is great news. But if you dig a little deeper, you’ll see a black shadowy cloud forming around us. To buyers this could be seen as a cloud of opportunity, but to sellers it just looks nasty. I recently met with local real estate attorney Richard J. Swift, Jr. of Garlick, Hilfiker & Swift, LLP to help me shed some light on this dark cloud.
“Dozens of foreclosures are being withdrawn daily by lenders who do not have the proper paperwork to proceed in prosecuting the foreclosures,” said Swift. He then went on to say, “The problems could be as simple as not locating the original note or more complicated where the lender bought a pool of mortgage loans which are collateralized by securities, but the actual property was never legally placed in the trust. The former may be corrected by a lender, but the latter could prove fatal to a lender.”
Although the number of foreclosures is down, the dozens of cases being dismissed daily may find their way back into foreclosure in the near future. The majority of the cases will ultimately be re-filed by the lender. The scary part is there is no data currently tracking these cases and the impact on future foreclosure trends is unknown. These foreclosures in limbo become known as “shadow inventory”. On the surface all seems good, but, in this case, when the sun is shining there’s always a shadow!
Some lenders have slowed the process of foreclosing because, let’s face it, they don’t want to own the property, just like the nonpaying borrower most likely doesn’t want it. Some lenders are not aggressively pursuing their rights and foreclosing a property because it is being attended to by the current borrowers. They figure that if someone is living there and keeping it up, that’s a bonus. They’ll file later; kicking them out of the house after the real estate market has stabilized. Since there has been no foreclosure filing it does not count against the foreclosure data (more shadow inventory).
Supporters of this theory state that lenders are taking down foreclosures in a systematic fashion and will only take back so many properties per quarter to keep the banking industry’s balance sheets healthy and Wall Street happy. If you’re a buyer, lick your chops, because it’s going to be good for some time!