91ÊÓƵ

After listing a modest Portland home for $175,000 in a neighborhood with no other homes for sale, Keller Williams principal broker Nick Krautter thought he might have an easy sale. But only days later, a bank-owned sign popped up in front of an almost-identical house next door with a price of $100,000.

Krautter knew, however, that the house hadn’t materialized from nowhere. It was part of what he and other real estate brokers have started calling shadow inventory.

On the heels of the recent mortgage crisis, the term is being used with growing frequency to describe housing units that haven’t reached the market yet, but inevitably will. Some of this inventory is made up of houses with defaulted mortgages that have not yet been reclaimed by banks. Other properties are owned by banks but haven’t been listed yet. But no matter where shadow inventory comes from, it has some local real estate agents worried that it could lead to Portland-area home prices dropping even more.

Their concerns are based mainly on hunches and intuition, but finding concrete data is difficult.

“…there’s no way to get the true numbers until the banks open their books,” Krautter said.

He has tried to track shadow inventory, and has counted nearly 1,000 homes in Portland that are currently in foreclosure. But there are only 518 active and pending foreclosed properties on the Regional Multiple Listing Service, a database of real estate in cities and counties across the country.

“There are two homes owned by (banks) to every home that is actually listed by them,” Krautter said. “There are lots of theories on why it is taking so long for these homes to get to the market, and whether it’s purposeful or not, people need to be more aware that it’s affecting the market.”

Those who believe in the existence of shadow inventory offer several reasons as to how it started and why it’s flourishing. One theory, Krautter said, is that banks and other lenders are holding onto foreclosed properties and doling them out slowly, in an attempt to keep home prices stable by not flooding the market.

But brokers like Krautter fear that strategy, if it’s actually happening, could end up backfiring on lenders. Lending institutions are overseen and regulated by the Federal Deposit Insurance Corporation and state regulators in order to make sure they have sufficient capital. As these institutions take on more bad assets, like foreclosed homes, they could be forced to unload them in order to maintain a ratio with sufficient low-risk capital. If a lending institution is forced to do this, an onslaught of foreclosures could be released at one time, and drive down home prices.

Robert McKean, president and CEO of Albina Community Bank, agrees that some lenders may be carefully timing when they reveal foreclosed properties to potential buyers, but he doubts they would ever be forced to flood the market with them.

“Regulatory stress usually develops over time, so I can’t see an instance where a lender would have to put all (its) property on the market at once,” McKean said. “Plus, regulated lenders are penalized if we hold a foreclosed asset on our books. Lenders don’t have an incentive to do this.”

Not everyone agrees that banks are using shadow inventory to try to keep housing prices stable. Betsy Shand, a loan officer who has also spent several years as a broker in Portland, believes shadow inventory is a product of banks being overwhelmed by the number of foreclosures they are taking control of and by the amount of time it takes to process each one. Based on her research, she estimates between 5 million and 7 million U.S. homes are in the foreclosure process, but haven’t been listed yet.

“It’s not as much strategy as it is process,” Shand said. “The foreclosure process is tedious, and both lenders and agents are still learning how to deal with them.”

Laurie Kresel, vice president of planning and business development with Unitus Community Credit Union, agrees that the foreclosure process can be a long haul. At large lending institutions, for example, a single foreclosure can take 18 to 24 months, she said.

Meanwhile, title companies have had to add staff and ask employees to work overtime just to keep up with the amount of titles that need to be cleared in order for properties to become bank-owned, Shand said. And before banks can actually call a property foreclosed, they must give the former owner 90 days to claim any belongings left behind.

The time it takes to process foreclosures isn’t expected to decrease anytime soon. In fact, many predict it will worsen before it improves. More banks are starting to bypass short sales, in which they accept less money for a house than is owed on it, in favor of straight-out foreclosures. And adding more foreclosures to an already saturated system means the time needed to process each will probably increase.

Krautter, meanwhile, is continuing to track Portland’s shadow inventory. He has seen the number of actual defaults increase even as the number of mortgages that are 30-days delinquent has gone up, which he said is a sign that lenders may indeed be avoiding short sales and letting shadow inventories grow.

The number of buyers is the determining factor in how far prices could drop once an existing shadow inventory is released on the market. With the tax credit for first-time homebuyers now expired, agents are anxious to see how many deals will be completed this summer.

“There has already been a drop in transactions since the tax credit expired,” said Joe Menashe, principal broker with the Broadway office of the Hasson Co. If the number of transactions continues to drop, and the foreclosed inventory grows, home prices are going to dip again, he said.