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more difficult to obtain a loan due to increasingly stringent lending guidelines found at most banks. As a result, FHA's market share dramatically increased over the past several years in the wake of the subprime lending controversy. This appears to validate the thoughts of many in our industry that investors and buyers with higher incomes bought available homes and decreased inventories, which drives up home prices based on demand. That demand could be significantly diminished if lower-income buyers are pushed out of the market. This probably isn't the formation of a new "bubble," but it could drive home prices down again in many markets. "Right now, credit is far tighter than anyone has experienced in decades," Stevens noted. "There may be families with good credit willing to put down substantial payments that are being frozen out of the market because the risks of making any mistake are too great—and the rules of the road are unclear—and often contradictory." Stevens makes it clear that failing to make mortgage loans available to moderate-income families could have a negative impact on the housing market, adding to concern that the housing recovery, if real, is quite delicate, indeed. Capitalizing on Capacity Because of the dearth of housing starts over the past several years and renewed activity in the new-home arena, prices rise fastest in this sector. Although trending up in terms of volume of housing starts, new home sales are miles behind where they should be. Sharga further remarked that following every other recorded recession, housing brought the general economy back from the brink. "This time it dragged the economy down, and therefore this recovery will not behave the same way others have," he said. Sharga feels confident, however, that we could experience an increase in home prices in 2013 of as much as 3 to 4 percent following the 8 percent rise in 2012—the caveat being that the lack of inventory drives price increases today, as does institutional investor interest. The skeptics pin their argument on this caveat. While many within the housing industry who operate on the front lines—including real estate agents and brokers, REO asset management professionals, and other veterans of mortgage default servicing—agree there are signs of a true housing recovery, those who remain skeptical point to the impact institutional investors play in diminishing inventories of distressed properties, often purchasing them in bulk at higher than market prices since they buy at lower than replacement costs. They say this is a factor contributing to artificial increases in home prices. While participation by investors can be healthy 58 for the housing market, admittedly, speculators can have a negative impact over time. Conditional Assertions Unsettling European economic issues also benefit U.S. real estate by attracting foreign investors from South America, the Middle East, and Asia to buy here, according to Sharga. Sharga cited other indicators that lead him to believe the recovery is real: » Steeper declines mean steeper rebounds as evidenced by California home prices rising 154 percent from 2000 to 2005 then dropping precipitously, but they are now on the rise. » Lending practices are far tighter today—FHA requires a FICO score of 700 or better. » Non-current loans for a period of three years are less than 2 percent of all mortgages—below historic averages. » Investors buy homes below replacement costs even if they buy at seemingly inflated prices. On the distressed market, Sharga offered the following: » Only 11 percent of loans are either delinquent or in foreclosure today—it was 15 percent at the peak. » Foreclosure starts are down (although procedural issues are part of the reason, particularly in states with judicial foreclosures). » California SB 1137 caused a temporary drop in foreclosures when it was passed in 2008, and the new California Homeowner Bill of Rights may also cause a steep drop with the potential for more loans to go through judicial foreclosure. » It takes an average of 1,100 days to process a foreclosure in New York (one year to receive a Notice of Default), and it's 900 days in Florida—in Texas, it takes 113 days. Shadow of Doubt But, of course, there also remains a significant "shadow inventory." Most industry leaders define the shadow inventory as unlisted REO homes along with unlisted homes in foreclosure or where borrowers are at least 60 days delinquent. At its peak, this inventory was as high as 6.5 million homes. Today it stands at 3.5 million—still substantial but decreasing sharply over time. Sharga says the protracted timelines caused by procedural issues and judicial foreclosures now drive the shadow inventory. That is certainly part of the problem. Another is "zombie foreclosures." "Zombie foreclosures, or vacant, abandoned properties, are a real issue because of these extended timelines," Sharga stressed. "According to RealtyTrac, there are 5,600 of these vacant properties in the greater Buffalo area and over 90,000 in Florida alone. Fast-tracking of the foreclosure process on these vacant properties is a real concern for property preservation providers and their lender/servicer clients." Unfortunately, because of the heightened stigma associated with anything related to the word "foreclosure," especially when paired with "fast-tracking," municipalities, counties, and states are reluctant to address this issue for fear of attracting negative attention in their communities. The reality is, however, that by fasttracking a "blight abatement" process on vacant, abandoned properties, additional real estate will be available on the market. This helps reduce the negative impact on neighborhoods caused by vacant properties and helps stabilize communities much faster. While about 90 percent of the information Sharga presented to attendees at the Dallas summit pointed to an optimistic outlook on the housing recovery, he candidly stated the obvious: A downturn in the economy could cause negative impacts on the housing recovery. "The recovery is real and sustainable, but it is also fragile," Sharga further noted. "Unemployment rates are artificially low and fewer people are actively looking for work. And, according to Gallup, the underemployment rate is 17.4 percent." Common sense dictates that high unemployment drives fewer home sales. Sharga says when the unemployment rate finally dips below 6.5 percent, housing sales should increase. The 6.5 percent unemployment rate, he added, may also trigger the Federal Reserve to stop quantitative easing, which, of course, could spark inflation and preclude many buyers from qualifying for mortgages. Moving forward, big banks may well cut back on originating mortgages and probably focus lending activity on loans that fall within the bounds of the Consumer Financial Protection Bureau's Qualified Mortgage (QM) rule. It's expected that non-bank lenders will become more active and fill the void. Non-bank lenders— potentially even what is referred to as "peer-topeer" lenders—will have a wide variety of loan products but still with stringent requirements. The debate over how real or how artificial the housing recovery is will no doubt go on for some time to come. In the end, we will all know the correct answer. While the numbers many experts point to seem to substantiate claims that it truly is real, Mark Twain would no doubt caution us about the validity of statistics. Lynn Effinger is a veteran of more than two decades in the default servicing industry. He is the business development manager for Assurant Property Advantage, the field services business unit of Assurant, Inc., a Fortune 500 company with annual revenue of $8 billion.

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