What Happened To The “Shadow”?

We keep hearing that there is another large wave of bank-owned homes about to hit the market. These are all the homes that the banks have foreclosed on (or should have foreclosed on by now), but haven’t been put on the market yet.

Why haven’t they been put on the market? There are a variety of reasons. First, there were all the government-imposed moratoriums mixed in with the banks imposing foreclosure moratoriums on themselves.  Sort of a “cooling-off period” to prevent catastrophic panic selling.
Second, many of these banks are just overwhelmed and can’t keep up with the workflow to process all these foreclosures. It may sound silly, but a lot of them may be just sitting in a pile on someone’s desk, waiting for them to wade through the hundreds, if not thousands, of files they are responsible for.
Third, this is a more complicated one: It has to do with the bank’s reserve requirements from the Federal Reserve. They are supposed to keep so much cash on hand to offset their “bad” loans. Well, a lot of banks don’t have enough cash, so they are delaying foreclosing on these homes to keep their reserve account intact. If they were to take on too many foreclosures, the Federal Reserve could declare them insolvent, and take them over.

All these factors have combined to keep many bank-owned homes off the market this year, which has artificially depressed the number of homes for sale. The big question is when will they all finally get released onto the market? No one knows for sure. And now we are starting to wonder if the banks and the government are going to be able to keep finding ways to trickle the inventory out slowly, instead of in a big glut? If they have, then this IS the bottom of the market.



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