There is much variation in the estimate of the number of homes currently in foreclosure and those that are seriously delinquent. As I noted in a previous blog post Lender Processing Services estimated that the number of delinquent and foreclosed properties was approaching 6.4 million. Different real estate research companies have differing ways of estimating this number however, and the estimates range from 1.6 million to 8.2 million delinquent mortgages. Capital Economics estimates that the shadow inventory is 4.3 million homes and they call this a cautious underestimate. They say that with 4 million homes waiting to be eventually added to the supply of properties for sale it will take 18 months to clear both the visible and shadow inventory of homes.
The Federal Housing Administration (FHA) may be the next big entity lining up for a bailout. FHA has a reserve of only 0.24% of the value of the outstanding loans they insure. The FHA has become increasingly important the last few years, as they insure the loans that traditional lenders make. They have insured hundreds of billions of new loans and most of them had very small down payments. Given the state of the housing market and residential property values it is very likely that many of these property owners are now underwater, or they owe more on their mortgage loan than their house is worth. It is now well known that when homeowners are underwater they are much more likely to default strategically. The Federal Housing Administration does not need to ask Congress for money. They can go straight to the U.S. Treasury and get money for continued operations. Of course, the Treasury's money is our money and once again, if this situation comes to pass, we will all pay.
