Remember the countless warnings and dire predictions about the so-called “shadow inventory” of foreclosed homes in the U.S. that was going to flood the market and stall the recovery? We were told as recently as the NAWLA meeting in Vancouver last April that a bottleneck of foreclosures would soon suffocate a housing market showing signs of life.
“It never happened – even after the five biggest U.S. mortgage servicers reached a $25 billion settlement with federal and state regulators in February. Instead, the number of residential properties for sale in the U.S. shrank to the lowest level in a decade, while prices have appreciated at the fastest pace since 2005.”

In The Foreclosure Wave That Wasn’t, Bloomberg cites several reasons why so many analysts got it wrong:

• Federal government loan modification programs and negotiated bank deals yielded over $15 billion in “principal forgiveness” and writedowns for homeowners
• Record low interest rates triggered a spike in mortgage refinancings, which lowered monthly payments for homeowners
• Institutional investors purchased thousands of foreclosed homes in bulk before they even hit the market, then rented them out instead of reselling.

Daren Blomquist, vice president of RealtyTrac, which warned a year ago that huge numbers of foreclosed homes were going to hit the market, also explains that “In hindsight, by delaying and prolonging the foreclosure process, that gave the market time to stabilize and get back on its feet. Maybe bureaucracy is actually helping, in this case, to diffuse the impact of the foreclosures. Talk about unintended consequences.”

Still, the article ends on a cautionary note, with a reminder that almost a quarter of all U.S. homeowners with a mortgage still owe more than their homes are worth, making them candidates for future defaults. Adds Robert Shiller: “It’s funny how people have so much confidence in the recovery. History shows that these markets are hard to predict.”