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Shadow Inventory – Does Anybody Really Know What Will Happen?

Articles are all over the media lately about the "shadow inventory" of homes that may be coming on the market as foreclosures in the near future.  There's also a "shadow inventory" of homes that sellers haven't listed, but will when they see an improvement in the market.  But that inventory may not be seen for a while if the foreclosure numbers are accurate.  Banks have begun to slow the foreclosure and first default notice procedures, mainly to protect themselves.  Too many foreclosures too quickly, and home prices drop even more.  Also, as banks must write off their losses only when the home sells, they don't want too many large losses too quickly.  So, default notices aren't going out in many cases when the homeowner first hits that 90 or 120 day late mark.  Once that notice goes out, the process must start, which will lead to foreclosure, sale of the home, and recording of the loss.  By delaying the notice, banks can control the entry of homes into foreclosure and when losses will be taken.  Reserves can be built up to handle the losses before they're on the books.  One recent article noted that there may be as many as 3 million homes that will go into foreclosure in the next two to three years.  The same article also noted that banks sent out fewer default notices in the last few months, even though there were more homes more than 90 days late.  Barring government intervention, banks may be taking more initiative to control the foreclosure inventory.  While it will give some homeowners more time in their homes, it's purely a financial planning tool.

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