The foreclosure market acts like a big sponge that absorbs passing rumors that affect the market. In the long run, most peter out as the months buzz by—but this is not true for all of them. There is one that keeps rearing up and has been loudly repeated among “the professionals” over recent months. It deals with the volume of foreclosures yesterday, today, and in the future.

Everyone assumes that they have acquired some inside information only available to those directly and continuously immersed in the foreclosure business. Some like to presume that they are in the inside and hear rumors that have validity—away from the scuttlebutt “fed to the public” on a periodic basis. Let me pass one such rumor along to you for your own evaluation.

There is no question that during this second decade into the new millennium, that the volume of properties going into and through foreclosure is mind boggling—even far more than the skeptics envisioned after the real estate bubble burst around 2005-2006. Fingers have been pointed at so many groups—profit-motivated lenders, misguided buyers, myopic governmental agencies and overseers, etc. Each group has gotten a bit of egg on the face. No one has admitted complacency nor remorse as all this happened, however, one group seems to regain prominence today as in the past. The lenders with the so-called “toxic loans” keep bouncing into the spotlight.

It is widely agreed that the lenders have kept a wary eye on the progress of Non Profit Growth the residential real estate market as it progresses out of catastrophe, into doldrums, and into possible life in recent months. They appear to have micro-controlled the flow or trickle of properties into the foreclosure stockade. Not too many, but keep the flow going. Why inundate the market which is so sensitive in the spotlight just now? Release some here and maybe a tad more over there and less here at this time. It is almost as if a cabal of some sort is behind the curtains watching the public’s reaction to the most recent twist of the spigot. There appears to be a second level of concern here that might have an important effect on the overall trend of the volume of foreclosures we see all around us.

The rumor says that lenders are inclined to go with the current flow when pushing defaulted owners into the foreclosure maelstrom. A large number of delinquent property owners with improbable (meaning problem) loans have not been urged to step off the cliff into the chaos which is the foreclosure process. How can the lenders tolerate the lag between the initial delinquency of residential borrowers and the continuing delinquency which extends over weeks and months? How can the underwriters who initially supplied the money to institutional lenders be mollified on a long term basis when no payments are flowing back to these sources? Why isn’t the whistle being blown? Does any other force impact the decision to lower the boom on delinquent owners? Does another reason exist for the hesitancy of the lenders to make the delinquent borrowers follow the leaders down forsaken path to foreclosure? Maybe so!

There is no question that lenders have hundreds, even thousands, of borrowers who deserve to be marked with the stigma of foreclosure. It appears, however, that a bit of subterfuge can be applied to the records if lenders are not required to admit to the poor quality of existing loans on the books until they choose to do so. Apparently, the king has beautiful clothes until someone points out that there are no clothes!

One loan is just like any other loan on the books until it is classified as a non-performing loan and then due to enter the constantly growing line of unpaid loans held by a huge number of unpaid lenders. In essence, we don’t have a problem until we admit that we have a problem. In the meantime, business proceeds as usual!

If this is true and we actually have a vast inventory of loans on which payments are not being made but such loans have not been identified as toxic, the surge of foreclosures to come is just now edging over the dam. How bad is this shadow inventory?

How many properties are hidden through an accounting system that unquestioningly follows instructions which say that no problem exists until someone says that a problem exists? If this rumor is true, the current wave of foreclosures is just a precursor for a greater wave of foreclosures approaching the horizon. All of us hope that the rumor is just that—an unfounded rumor with no basis in reality. If a second wave in the foreclosure tsunami is about to descend as lenders lighten their toxic inventory, life in the residential property market can get pretty ugly before it gets better.

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