Jan062012

Shadow inventory much larger than publicly disclosed

Today’s post comes out of the conspiracy theory vaults, but it supports a contention I have been making for the last few years: shadow inventory is much larger than most housing analysts believe. CoreLogic reports shadow inventory at 1.6 million units. With nearly 10 million loan owners underwater and prices falling, hope is fading for the middle class hanging on to their dreams of equity. Many of these people will strategically default, and if the featured article today is accurate, perhaps many of them already have.

Michael Olenick: Is Shadow Housing Inventory Vastly Larger Than Widely Believed?

By Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick

The turn of the year is the time to make predictions and projections. I’m optimistic that the tide will finally turn for the American middle-class, suffering silently in a one-sided economic war. I don’t think this will be because of altruism, or even justice, but rather simple pragmatism. Specifically, I believe that parasitic financial institutions have pushed the boundaries so far that they’ve put their host, the middle-class itself, at risk. One new bit of information suggests the housing front is in more perilous shape than most pundits believe.

One challenge when performing any type of analysis is that information is scattered in many different places, and even when disseminated by the government its accuracy is oftentimes questionable. We’ve already seen existing home sales for recent years revised downward from their already dismal position, with barely a yawn from the public and no accountability whatsoever from government regulators who used that information when more reliable sources existed.

The NAr is an abomination. Their data is flawed and manipulated, their sales tactics are reprehensible, yet somehow they have managed to dodge taking any responsibility for the debacle they helped create. They should be relieved of the responsibility for tracking housing sales data for the good of the general public. They can still report their bogus information, but an accurate government accounting should be undertaken.

I don’t understand why accurate housing data, which is supposed to be open to the public, is so hard to come by. The housing crisis arguably rises to the level of a national emergency, one we can see and fee every day as it ripples through the economy. Despite that, government-owned Fannie Mae still keeps loan-level data away from the public, it’s extremely difficult to get data from Freddie Mac, and MERS’ database remains a black hole.

And since most of this information is public record, there is no reason this information can’t be publicly compiled and disseminated. CoreLogic is tracking this data, but since they are one of the only groups doing it, they charge a great deal for it, and the general public doesn’t get the benefit.

There is one piece of data only recently released — and, as far as I can tell, has gone unnoticed — that, if true, suggests the housing market is in such dire straits we’ve finally reached a critical mass where only radical out-of-the-box solutions will work. If this information, which comes of a highly suspect albeit well connected insider, is accurate, then extend and pretend has finally reached its natural end.

I recently reported a Surge in discounted REO expected next year. Perhaps amend, extend, pretend really is coming to an end.

On April 15, 2011, Ft. Lauderdale, FL attorney Steve Jaffe took the deposition of former “Foreclosure King” David J. Stern. For whatever reason the transcript was not filed until Dec. 21, 2011, and with the holidays it’s taken even those of us who’ve been watching the Stern road-wreck — a group he actually hands a shout-out to towards the end – some time to plow through the 277 pages. …

Here’s the excerpt that should send a chill down the spine of any housing analyst … and everybody else too.

Jaffe: .. you’re reading reports. You’re seeing volume. You’re seeing new file intakes. You’re seeing how fast they’re closing. And you’re seeing cash flow in and out of the company.
Stern: Okay.
Jaffe: And so, you have — in 2010, you have a handle on what’s happening with the business?
Stern: As the numbers are reported in the quarterly earning calls and the investors or the world, whoever elects to participate in that call is made aware of the day-to-day happenings.
Jaffe: Right. But you have that information, that institutional knowledge of your own business far in advance of those calls and reports for that matter.
Stern: When Fannie Mae comes in and sits down and says, “David, we have 600,000 shadow inventory loans,” we say “You mean, 60,000″? And they go, “No. We mean, 600,000.” And I say, “Oh, that’s nationwide”? And they go, “No 600,000 shadow inventory in the State of Florida”. Sure, I know. Yeah, it’s exciting. [Note: transcribed verbatim from the transcript.]

Let’s repeat that. In the spring or summer of 2010, before the robosigning scandal caused a massive slowdown in the number of foreclosures filed, Fannie Mae apparently had 600,000 loans they expected to foreclose upon. Not Fannie Mae, Freddie Mac, FHA, VHA, and private label mortgages, Fannie Mae alone.

Did the GSEs reveal the true nature of their problem to David Stern? He was the biggest foreclosure mill in Florida, so if they would tell anyone, it would be him. Is he accurately revealing what they said? That is another question.

Granted, Stern has a credibility gap; he’s clearly one of the lawyers whom FHFA Director Edward DeMarco was clearly referring to when he expressed to Congress that he was “puzzled” why state Bar associations have taken no disciplinary action. The Federal Housing Finance Agency (FHFA) is the government agency which oversees the GSE’s.

Edward DeMarco has a credibility problem too. If his agency did reveal this information to David Stern, he would have incentive to publicly discredit him.

FHFA reports that Fannie Mae’s share of total US mortgage debt, at the end of 2010, is 27.7%. If Fannie Mae really does have 600,000 homes they expect to foreclose upon we’d expect to see about 2,165,000 shadow inventory homes total .. in Florida.

It’s impossible to believe this figure is accurate. Let’s look at some data. First, the Census Bureau reports there are just under nine million housing units in the entire state at the end of 2010, 8,989,580, to be exact. According to court records between July, 2010 through December, 2011, inclusive, there were 1,044 foreclosure filings per month in Stern’s home county, Broward County, FL; 22,144 filings total. However, from January, 2009, through June, 2010, inclusive, there 2,544 monthly filings in the same county; 48,144 filings total.

If the number Stern relayed is accurate, that would put a theoretical backlog of filings, for that one county, at 26,000. If we extrapolate to the rest of this high foreclosure state it’s safe to say shadow inventory estimates for the US have been dramatically underestimated, in much the same way that existing home sales were overestimated, albeit to a much more severe degree.

I think shadow inventory numbers have been grossly understated. If everyone knew how many of their neighbors weren’t paying their mortgages, nobody would pay, and our entire real estate lending system would crumble. Strategic default is already a huge problem for the banks, so they would prefer to keep this information secret.

One thing is certain. Either a) Stern lied during his deposition, or b) Fannie Mae lied to Stern, or c) government and non-government organizations that project shadow volume have massively blown it.

Those are the only plausible alternatives. Which one do you feel is most likely and most accurate?

On Wednesday, Dec. 21st, 2011, HousingWire reports that CoreLogic projected shadow inventory to be 1.6 million homes throughout the entire United States. If Stern relayed the information correctly, and Fannie relayed it to him correctly, that figure looks more like it could be the shadow inventory of South Florida alone. Except that would mean they expect to foreclose on about half the houses in this state, which seems … impossible.

All this calls for far more disclosure on the part of the GSE’s, regulators, and courthouses. There is no legitimate reason to keep these figures locked away behind password-protected websites. Everything from the MERS database, to the Fannie/Freddie loan-level information, to the pile of mortgages the Federal Reserve has purchased should be open. This issue rivals a pressing matter of national security: there is no reason to force investors, home buyers, and others to speculate; to search for information.

The banks have every reason to keep this information secret, but the general public has every right to know. If shadow inventory really is that large, don’t you feel you would have a right to know before you became an unwitting knife catcher? We demand transparency from stock exchanges and other financial markets to prevent the very kind of fraud being perpetrated on the US housing consumer. Where’s the outgage?

But if Stern’s figures are anywhere near accurate it makes me optimistic that 2012 will be a turning point. Why? Quoting John Maynard Keynes, the only economist who seems to know how to pull a country out of an economic depression, “If you owe your bank manager a thousand pounds, you are at his mercy,” Keynes said. “If you owe him a million pounds, he is at your mercy.”

If he’s even partially correct then congratulations, Wall Street; we’ve reached a place where the foreclosures would cause Housing Armageddon. Where the middle-class itself has become Too Big To Fail.

So what say you? Is this conspiracy theory craziness, or is shadow inventory much larger than widely believed?