In the first quarter of 2010, 34,336 Colorado homeowners were pinning their hopes on keeping their homes out of foreclosure through the Obama Administration’s flagship program to help people keep their homes.

In the first quarter of 2011, only 5,017 Colorado homeowners were in the required “Active Trials” portion of the Home Affordable Modification program, better known as HAMP, according to an InsideRealEstateNews analysis of data released today.

That’s a 85.4 percent drop.

Much of the big reduction is by design.

In mid-2010, the Treasury Department advised servicers to pre-screen homeowners entering the program, because such a large percentage of them were not qualifying for permanent modifications, which can lower mortgage rates to as low as 2 percent.

Nationally, borrowers in the permanent program have saved $5.9 billion in lower mortgage payments. Savings by Colorado homeowners equates to an estimated $82.6 million, according to an InsideRealEstateNews calculation.

In March, a record-low 1,597 homeowners in Colorado entered the active trial, a 3.7 percent drop from the previous low in February. However, a record 8,222 homeowners are in the permanent modification program, an increase of  395 people from February.

“Fantastic news”

“That is fantastic news,” said Shannon Peer, Housing Counseling director at Brothers Redevelopment, which is in charge of the Colorado Foreclosure, 1-877-601-HOPE.

Although some politicians and real estate officials have been calling for the elimination of HAMP, or a major overhaul of the program, Peer is not in that camp.

“Especially not with what we are seeing with March numbers,” Peer said. “Helping 400 people keep their homes is incredible. We’ve been noticing that during the last six or eight months, typically the number of people entering the permanent part of the program has been consistently in the 235 to 250 range, so this is a pretty big jump.”

Banks increasingly helping

Beyond that, counselors at Brothers Redevelopment have been noticing that many people turned down by HAMP, have seamlessly been moved into proprietary programs offered by the banks.

“That was always supposed to happen, but the reality was that it was not always the case in the past,” Peer said. “I think the servicers are more efficient in moving people into proprietary programs than they have been in the past.”

The huge drop of people entering the program from a year ago does not bother Peer.

“We anticipated a big drop in the number of people in the active trials,” Peer said. “Now, if you are accepted into the trial period, there is a very strong correlation that you will be accepted into the permanent program.”

Unemployment the culprit

Also, HAMP originally was designed to help people with extremely high mortgage rates that they couldn’t afford.

“Now, of course, the problem is with people who are unemployed or under-employed,” Peer said. “We’re seeing a big increase in servicers moving people into forbearance programs, which buys them time. Many people who are facing losing their homes do eventually find work, and can start making payments again.”

However, no matter how low the mortgage rate, HAMP will not help some people with no or very little income.

“Sometimes is it jus a timing problem, when you’re applying for HAMP,” Peer said.

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The shadow market in the Denver area is 13,888 homes, according to the Amherst Mortgage Insight report released by Austin-based Amherst Securities Group, which puts the total inventory – including the shadow market – at 31,618 unsold homes, based on data from Trulia.com. The shadow market, as defined by Amherst, are homes that are in or facing foreclosure, but are not yet on the market. Others also include homes that are being rented, often for less than the mortgage amount, because the owners are unable to sell them for a profit, but plan to sell them when they think the market is starting to recover.

“We keep hearing about this shadow market, but this is the first real quantification I have heard of,” said Tom Cryer, a broker with the Kentwood Co. “This report takes the shadow market from being something of an urban myth, to something that really exists. I do not see anything that could dispute it.”

If the shadow market could add almost another 14,000 homes to the Denver-area market, that could slow the recovery of the low-end homes that seem to be stabilizing and even appreciating, Cryer said. In August, there were 24,648 unsold homes on the market in Denver area, 20 percent fewer than a year earlier, according to a separate analysis of Metrolist data by independent broker Gary Bauer.

One way to look at it, is that the shadow market would bring the supply more in line with its historical levels.

Rinner: Inventory low in Denver

“But we have such a low sales rate,” that people are not putting their homes on the market, keeping the inventory low, said Mike Rinner, of the Genesis Group, which tracks housing along the Front Range.

Nationwide, the shadow market is 7 million homes, equating to a 1.35-year of inventory, according to Amherst. “The single largest impediment to a recovery in the housing market are the number of loans that are either in delinquent status or in foreclosure, destined to liquidate,” according to the report. “This creates a huge shadow market,” the report notes.

More bad news could be on the horizon, despite recent positive trends, such as reported in the S&P/Case-Shiller report, which found that most of the 20 statistical areas had shown a month-to-month increase from July to August. The Amherst report analyzed the 20 cities in the S&P/Case-Shiller report, including Denver. It found that only six cities – led by Las Vegas, had a larger shadow market, as a percentage of the total inventory, than Denver. In Vegas, the total shadow market accounts for a 315 percent increase over the number of actual listings.

Shadow market growing

And the shadow market could become an even larger problem. The Amherst report notes that “to the extent that there is more home price depreciation (causing higher volume of defaults), the problem could escalate.”

Rinner, of the Genesis Group, a local company that tracks housing along the Front Range, said the report “makes a strong case that the other shoe (of foreclosures and depressed pricing) is waiting to drop. “However, he added you always wonder how good the research is of “experts from looking from afar.”

Still, the report attempts to quantify the shadow market, which is valuable for predicting the direction of the market.

“Probably the most interesting thing to come out of it, is that we do have an excess supply that isn’t frequently recognized,” Rinner said. But he said there is a saving grace, which may help to mitigate the blow of the shadow market.

“We do have a pent-up demand,” of buyers who want to take advantage of low-interest rates and low home prices, he said. Even though unemployment is high by historical standards, 93 percent of the people in the Denver metro area still have jobs, he said. The main thing that keeps people from taking advantage of the housing market is concerns about their jobs, he said. “Over time, as that starts to go away and people feel more comfortable, and unemployment starts to fall or stabilize, people will start entering the market again,” Rinner said. “The excess supply will get used up.”

On the other hand, as the Denver-area population ages, that older demographic is not as likely to move as quickly as younger buyers who are forming and growing families, he said. However, as builders construct greener, more sustainable homes, and owners retrofit homes with green features, that could increase the demand, he said.

Amherst, in its report, said that more needs to be done to lessen the impact of the shadow market.

“We believe that the housing overhang is the single large issue inhibiting a housing recovery,” according to the report. “We are concerned that, in light of this overhang, the housing market , stabilization is temporary based on seasonal factors, and prices can deteriorate further. We believe a more permanent stabilization must await some resolution of the shadow inventory.”

Contact John Rebchook at JRCHOOK@gmail.com or 303-945-6865.

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