Oana Sterlaci: Hello and welcome to Todd Miller Tv. I’m Oana Sterlacci and this is Todd Miller.
Todd Miller: Hello
Oana Sterlacci: and we are here to talk about this myth that everybody’s been talking about, about shadow inventory. Tell us what that is and does it really exist?
Todd Miller: That’s a good question. First of all thanks for starting off the show.
Oana Sterlacci: You’re welcome.
Todd Miller: Okay, so shadow inventory, there’s this myth that the banks have foreclosed on all these properties and there just sitting on them and the truth is-that’s not the case. They don’t own the property, so I think the confusion is the word ‘foreclosed’. People don’t understand that foreclosure is a generic name for an entire process. From the time they file a notice to the vault to when the file a notice to the trustee sale, to when they actually attempt to sell it at a trustee sale and then they take ownership, that whole process can take anywhere from 120 days to years. So let’s say that banks in general have filed notices of default and trustee sales but they keep postponing and cancelling the actual sales dates and then they just wait 6 months or 3 months and re-do that again. Well those homes that haven’t actually been foreclosed, that is what the shadow inventory is; it’s the homes we don’t know about. When a bank forecloses on a home they immediately hand then to an agent to sell their house because they need to protect their interest in the property, get the money back so they can re-loan the money. So this myth that their foreclosing home and sitting on them cause their trying to stabilize the market and all this other stuff-not really true, they just haven’t foreclosed. So the important question is then-why are they doing this? Why are they waiting 2 years? Because in 2007 and 2008 it was 90 days after the notice of default they filed the trustee notice and then they foreclosed. So you tell me why you think they’re not doing this, why they’re just postponing and canceling and doing all this.
Oana Sterlacci: Well a lot of it has to do with the controversy regarding signing and that sort of thing, I think the largest part is simply the amount of volume versus the amount of staff they have to process all of this. And it’s not just the banks, it’s also the legal entities and the counties and all these people that are involved in the foreclosure process, there simply is not enough staff to deal with that. The other issue is market absorption. I think that’s a big concern, you certainly don’t want to bring a ton of inventory into market at the same time. We saw that happen a couple years ago and that’s when we took the biggest hit in values in the shortest amount of time. So I think there’s a combination of reasons for this shadow inventory out there. The other thing is with all the different political programs out there, there was a lot of –well let’s just see and what happens-both on parts of homeowners and the banks to see are we going to get more money, are the homeowners going to get money, what exactly is going to happen, what makes the most business sense, what makes the most political sense to deal with this because let’s face it-foreclosure is a very politically unpopular thing and banks are not unaware of that. They do want to still appeal to consumers, they want consumers to trust them, borrow from them and do business with them so there are a lot of complicated reasons for that but the bottom line is that this process take longer now that it did before due to the huge amount of possible homes out there that would qualify for a foreclosure.
Todd Miller: I completely agree. So there’s this, sort of, process and they found that there’s constrains along the way which is capacity and they’re not going to just dump on the market a ton of houses which is what I hear people say ‘prices are going to fall even further’ well in some cases we were pulling houses for an investor yesterday and a house that was selling for about 39,000 had sold for 267 in 2005, so there’s not a lot of downsides. So I think if your waiting for this ‘flood’ I don’t think it’s going to happen. I think this is actually a good sign that there’s actually some entity out there regulating the flow of inventory back into the market because it does stabilize the market, give investors the chance to buy, hold, and rent or buy and flip and do other things and I think that this chance of the market ‘collapsing’is already done and I think we’re beyond that.
Oana Sterlacci: I think we’re beyond that for a lot of reasons, one of the is capacity like you said, and the other part, it’s just lessons of the past.
Todd Miller: Yeah good. Well that is the episode for today. Thanks for being a gracious host.
Oana Sterlacci: You’re welcome
Todd Miller: I look forward to seeing you on the next episode.