Salient to Investors:

The flood of foreclosures predicted by experts two years ago has failed to materialize. Instead, the number of properties for sale shrank to the fewest in a decade, prices appreciated at the fastest pace since 2005, and the gradual healing of the housing market helped boost consumer confidence and the economy.

Banks have stepped up foreclosure alternatives to avoid legal challenges, while Investors are purchasing foreclosed homes in bulk before they even hit the market, further limiting new supply.

Susan Wachter at Wharton said she was wrong to fear a wave of foreclosures when the settlement came, while changes to Obama’s loan-modification program had the biggest impact on reducing pending foreclosures since late 2010 by creating a template that lenders followed. Wachter said an estimated 1 million homeowners qualify for payment-plan changes with principal reductions under Obama’s guidelines.

Joshua Rosner at Graham Fisher said slowing the foreclosure process has allowed banks to avoid booking losses on non-performing loans – the goal all along for banks, servicers and the government was to slow walk the whole thing.

S&P/Case-Shiller Index showed home prices in 20 U.S. cities rose 3 percent in September from a year earlier, the most since 2010. The median price of an existing home sold last month jumped 11 percent from a year earlier, the steepest annual increase since November 2005, while the number of previously owned homes on the market in October fell to the fewest since December 2002.

The shadow inventory of pending foreclosures is shrinking as new defaults decline and banks work through their backlog of bad loans.

Vishwanath Tirupattur at Morgan Stanley said distressed properties brought to market over the next year won’t be enough to depress values, and the shadow inventory has declined faster than expected.

Nela Richardson at Bloomberg Government said the shadow inventory still looms but won’t emerge all at once.

Mark Fleming at CoreLogic said the best, lasting legacy of the crisis is that the industry has created a more nuanced approach to loss disposition – the idea of evaluating a delinquent borrower for all different alternatives is here to stay.

Robert Shiller at Yale said the inventory of potential foreclosures remains a threat across the US and could result in a new wave of defaults and depress home values, especially if the economy slows. Shiller wonders why people have so much confidence in the recovery as history shows that these markets are hard to predict.

Anthony Sanders at George Mason University said delaying the process may be hindering a faster recovery – the best cure for any market meltdown is to let prices fall to their natural level Sanders said the wisdom of delaying foreclosures etc. was more a political act than an economic act.

The vacancy rate for rental homes is at its lowest rate since 2002, and the vacancy rate for owner-occupied properties is at a level last seen in 2005.

Foreclosures are attracting investors, many of which aim to turn them into rentals. Private-equity firms are raising as much as $8 billion to buy single-family homes. All-cash sales represented 29 percent of existing-home deals in October, while investors purchased 20 percent of homes in October.

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