What is foreclosure stuffing?

Ran across a new term at the Zero Hedge blog called foreclosure stuffing.

Foreclosure stuffing is a term that describes lenders’ efforts to slow the foreclosure process as long as possible in order to keep the prices of the existing foreclosed homes on the market from falling too rapidly.  It’s an effort to control the price by controlling the supply.

How do lenders slow down the arrival of foreclosed homes on the market?  They don’t foreclose on people, even when they’re in default.  They allow the borrowers to live rent-free.  Why are they doing this?  They’ll take a loss on the property if they foreclose, because even the market rates for some of their properties won’t allow them to pay off the loan in full, let alone a “distressed property” price, which can be quite a bit lower.

So, as people live rent-free in their homes, the banks bleed due to this build-up of shadow inventory.  The banks are stuffing a block into the foreclosure pipeline.

The result for buyers is that the prices remain higher than they would otherwise.  People are being allowed to keep their homes, even though they’re not paying for them, and probably shouldn’t be in them.

Some estimates (Zero Hedge) put this “foreclosure backlog” at 2.5 million homes.  This will take a while to clear up.

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