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‘Shadow’ Foreclosures May Threaten O.C. Market

Fewer banks and loan servicers have been holding foreclosures since August 2008, but more and more mortgages are falling into default, creating a “shadow inventory” that may jeopardize the Orange County market's ability to recover from the housing crash.

The proportion between bank-owned properties and the total existing mortgages in the county has been steadily falling for more than a year, even dropping to 0.27% in October, according to reports from real estate data provider First American CoreLogic.

However, the ratio of mortgages behind by at least 90 days has been rising just as steadily as far back as early 2006. In October, the same month the distressed-home ratio hit bottom, the defaults reached a high of 7.4%.

This disparity implies that the shadow inventory, or the backlog of homes that will be up for foreclosure or short sale later on, has been growing continuously for years. This in turn can mean another spate of foreclosures as soon as the current one ends.

One of the most commonly cited reasons for the expanding gap is the government's loan modification program launched last February, which has started over 500,000 trial loan modifications since. Studies show, however, that they have simply delayed foreclosures for most troubled homeowners rather than prevented them.

As of the Treasury Department's latest report, only a small percentage of trial loan modifications initiated under the program have been turned permanent as homeowners fail to comply with the paperwork. Many of those helped end up back in default after a few months, according to various studies.