A government report says that 1.7 million homeowners are 90 days or more late in their mortgage payments.
As of September 30, 2012, HUD held 37,445 REO properties while the GSEs held 158,138. In addition, the “shadow inventory”—residential loans at least 90 days delinquent—totaled 1,708,033 properties, roughly 8.7 times the size of the HUD and GSE REO [foreclosed] inventories combined. Even a fraction of the shadow inventory falling into foreclosure could considerably swell HUD and GSE inventories of REO properties.
Fannie Mae and HUD will wind up with these homes on their books, unless they decide to let the homeowners live rent-free.
This is shadow inventory. It hangs like the sword of Damocles over the housing market.
If the government does nothing, these homeowners will receive a huge subsidy: a tax-free grant equal to their mortgage payment, month after month, year after year. Now, that’s the welfare state in action!
But if it forecloses, what will it do with these empty houses. Then the subsidy goes to operators of the squatters. Watch them tear up the property!
Will the government kick the can? Probably. Then will you and I pay for this? Of course.
Or will the government foreclose, kick out the ex-homeowners, and auction off the homes? That would be the smart thing to do. So, it won’t be done.