More Foreclosures, More Bankruptcies?

Five million homes lost to foreclosure by next month in the current foreclosure crisis.  Many bankruptcy cases have been filed to try to save homes, or, get out of mortgage debt still owed after the foreclosure process.

Filing bankruptcy does stop foreclosure.

So, five million, we must be about done, eh?  As we say in Michigan’s Upper Peninsula.  Michigan being one of the states that allows mortgage companies to chase homeowners for deficiencies on mortgage notes that are not satisfied in the foreclosure process.

Not so fast.  According to Dr. Housing Bubble, there are still another five million homes at risk of being foreclosed.

One of the foreclosure crisis consequences is the increased number of homes for sale, after being foreclosed.

More supply, price goes down.  Price goes down, more homes underwater, cannot be sold or re-financed, get foreclosed, and the vicious spiral continues.

But the mortgage companies do not put all of their REO, Real Estate Owned, properties up for sale when they take title through the foreclosure process.

They have been holding lots of them, because of the above cited vicious circle.  They would rather not dump more homes on an already depressed market, and put more downward pressure on prices.

These REO homes not yet up for sale are called:  shadow inventory.

The chart linked to above uses the phrase:  “Number of properties in foreclosure pre-sale inventory,” which was still 1,940,000 as of September 2012.

Home prices have been rising in most areas of the country, albeit modestly.  And shadow inventory has been declining.  So, what’s not to like?

Writing for BusinessWeek, Peter Coy explains that there is enough evidence to worry about the shadow inventory potentially wrecking the positive gains experienced by the housing sector in part of 2011 and all of 2012. 

It is easy to go back to the pre-bubble mindset, that housing prices will go up every year.  But, new home building is rising, there is still huge shadow inventory, and the overall economy could be headed back into recession.

As always, before making decisions, get the facts.  How much is your home worth, how much do you owe on the mortgages, and talk to the experts about your options.

You may be able to file bankruptcy to discharge second or third mortgages.  You can cram down a mortgage to the value of the home in bankruptcy, if it is not your principal residence.