Shadow Inventory of Bad Loans Still Too High

Financial FAQs

The shadow inventory of troubled homes fell to about 2 million in April, down 18 percent from the same period in the prior year, and down 34 percent from a peak of 3 million in early 2010. But that is still too many homes in trouble for the Fed to begin to reduce its asset purchases.

Shadow home inventory includes properties with seriously delinquent mortgages, in foreclosure or held by mortgage servicers, but not yet listed, according to CoreLogic, an Irvine, Calif.-based analysis firm. Bad loans are working their way out of the system, and new mortgages for borrowers with better credit are taking their place. Also, rising home prices and low interest rates are helping troubled owners sell or refinance their homes, reducing the pipeline of foreclosures.


Graph: WSJ Marketwatch

This is when interest rates have risen to 2-year highs. A gauge of mortgage applications has contracted almost every week since mortgage rates started climbing more than two months ago, according to data released Wednesday. For the week that ended July 5, the Mortgage Bankers Association’s barometer of mortgage loan application volume fell 4 percent as rates hit the highest level in two years.

Graph: WSJ Marketwatch

Interest rates have risen some 1 percent since April, which means some consumers will have a tougher time affording monthly mortgage payments. With a $417,000 conforming loan, that 1 percent rise means either a borrower needs 8.6 percent more income, or a home worth 8.6 percent less. With 20 percent down and a $417,000 loan, that would mean a reduction of $41,000 in what a prospective buyer could afford.

This will not encourage middle class buyers who now have to earn some $74,664 per year to afford a home in that price range. This has to slow down housing activity to some extent, which is another reason for the Fed to stand pat at present.

Harlan Green © 2013

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About populareconomicsblog

Harlan Green is editor/publisher of, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
This entry was posted in Consumers, Economy, Housing, housing market, Weekly Financial News and tagged , , , , , , , , , . Bookmark the permalink.

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