You have heard the term “shadow inventory.” It was initially coined to refer to the housing inventory that lenders owned, post-foreclosure, but had not yet placed on the market for sale. It has been feared for years and is the subject of much speculation – how much are those lenders really holding back? Since the inception of the term years back, it has been used broadly, as has included inventory that has not yet gone into foreclosure but may. The media has blown the term out of proportion, and the average American thinks it is something to really worry about…but it is NOT.

The tides of the real estate market have really turned in the past year. Lenders have created their own programs, along with federal and state programs, that have actually kept the foreclosure numbers down. Lenders are accepting more short sales and moving forward with less foreclosures, precisely because the lenders do not want to sit on inventory that they have to rehabilitate and sell. They are in the business of lending money, not selling homes.

I’ll put it another way: lenders do not want distressed inventory. In fact, Alex Charfen, founder and CEO of the Charfen Institute and regular commentator for MSNBC and Fox News, agrees that shadow inventory does not exist. He points to the actual bank holdings (which he has seen), and bases this assumption on actual communication with those at the highest levels within the lending institutions. He states flat out that “banks are not holding properties off the market.”

The bottom line is that “shadow inventory” is not a concern. In fact, if you want to be afraid of something real estate related, chew on this:

- It is less expensive to purchase a home then to rent. The last time in history that such was the case was in 1973.

- Housing is more affordable than it has ever been…BUT inventory is very low. Statistics say that inventory will take 3-5 years to shift. In that time, it is safe to say that interest rates will likely rise.

- Standards of getting a loan, while offering more protection for buyers than ever before, have shifted and it is now harder to qualify for a loan.

- Meanwhile, due to the lack of inventory and the greater demand in the housing market, prices continue to rise and competition is fierce – cash investors purchased 30% of homes in 2011 (and that number will likely be higher for 2012).

If you have been considering buying a home, now is the time. I don’t say this because I want to sell more homes, but because it is simply the truth. Many people waited back in 2006/2007 to sell – they saw prices rising like crazy and thought they would wait until they got just a tad higher, so they they could sell and reap bigger profits. Many of those people went into foreclosure or had to short sell their homes after the market plummeted. Don’t get left in the cold.

In case you haven’t been following the news lately, there is a lot of real estate-related news making headlines right now. Here are some of the big stories:

1.  Underwater homeowner refinancing to include non-Fannie and Freddie backed loans? Many people are aware that the new version of HARP will reach out to help homeowners who are underwater (see the previous blog), but still many more have been asking whether they will be able to seek similar refinancing possibilities if they do NOT have a loan backed by Fannie and Freddie. There have been rumblings about this, and last week I saw a few articles on this topic. HARP2, which is expected to roll out in a few weeks, is expected to open up the refinancing option to many homeowners who are underwater. Once that ball gets rolling, look for more information on applying similar relief to those who are underwater but do not have loans backed by Fannie and Freddie. This could change the housing situation and prevent many future foreclosures.

2. Home purchasing is the most affordable in decades. According to an article published last week by CNN, the National Association of Home Builders/Wells Fargo Housing Opportunity Index, housing price declines and low mortgage rates have created a rare opportunity for those who earn national median salaries – 75.9% of all new and existing homes for sale fell within that affordability range during the last quarter of 2011. The number has not been this high in the 20 year history of the index. Of course, whether one can afford a home versus whether one can actually buy one are not one and the same – obtaining loans are still tricky for many borrowers.

3. Distressed inventory is keeping California home prices low. Despite the increase in housing inventory last month, prices in California remain low due to the number of distressed inventory on the market, according to the California Association of Realtors. The Association reported that the median price of a single family detached home dropped 6.7% in January from December, and that compared to January of 2011, the median dropped 3.9%. With inventory rising and heading into the Spring sales season, it will be interesting to see what happens to prices, as some areas seem to be on the upswing.

4. Delinquency rate is dropping (but is that telling?). The rate of delinquencies has been dropping, as reported by the Mortgage Bankers Association, and is currently at only 7.6% of all mortgages. Still, about 44% of all homes in the U.S. are currently in foreclosure proceedings, which doesn’t really make the first figure sound too promising. Although California is ahead in clearing it’s backlog of distressed inventory quicker than many other states, now that the robo signing lawsuits have been settled we may see more properties go into foreclosure – a large percentage of these were waiting in the wings while the settlements were being negotiated. Also, we need to factor in HARP2, which will come into play in a few weeks – this could also have a big effect on preventing foreclosures, especially if the administration extends it to non-Fannie and Freddie backed loans, as planned. So, stay tuned – it will be an interesting year for distressed inventory.

5.  Property valuation fraud increases. The recently released Mortgage Fraud Risk Report indicated that property valuation fraud increased 8% in the fourth quarter of 2011. Arizona was ranked the riskiest state for fraud, with Nevada in close second. California ranked fourth. The report studies four specific types of fraud risk: property valuation, occupancy, identity and employment/income.

Over the past several years there have been attempts to let judges take over lender issues, such as those related to foreclosures and bankruptcy. Some states, like California and New York, have allowed judges to intervene in ruling on improper foreclosures, or in cases where lenders assign mortgages for which they have no documented proof of ownership. There is much controversy in allowing the courts to step in and help fix some of these housing-related issues, but I think it is high time we do so.

The courts, although not known for being expeditious in many instances, could revolutionize the housing crisis by appointing judges to focus specifically on these cases. Not only would it protect future homeowners from wrongful foreclosures, but it would send a message to lenders to be more thorough in their processes, and likely lead to more and quicker loan modifications and short sale blessings.

Call me simple, or maybe blame it on my law school education, but I don’t understand why so many problems take so long to remedy, when all it does is create more problems and batter our economy even further. There ARE solutions to problems, but it seems we don’t tend to implement them. Politicians talk about solutions until they are blue in the face, but why not just put one in place and see what happens. Things can’t possibly get any worse. If it doesn’t work, we’ll try something else – but we can’t sit around doing NOTHING!

So I say let the judges look at pre-foreclosure filings. Make the lenders prove ownership. Jumping through these hoops a few times will likely be a hassle, hopefully causing lenders to think twice about NOT looking at loan modifications or short sales as options for distressed sellers. The burden on the legal system and the expense associated with it would likely be temporary, and surely not as great as the current strain on housing and the costs of foreclosure.

What do you think?