The topic of foreclosure statistics is interesting. In particular, when we refer to average prices and percentage of overall market sales, we should also consider the effect of the “Phantom Inventory”.

Banks (big and small) across the country are holding back foreclosed homes from the marketplace creating a commodity effect or “Phantom Inventory” and manipulating the supply portion of the supply/demand equation.

Despite the fact that real estate investors may see this as an OPEC-style tactic to manipulate prices (in the bank’s favor), the fact is that the banks need to recuperate some portion of the original balance of the note. A surplus of houses would certainly dilute prices, especially in healthier markets like Dallas. Furthermore, a glut of houses on the market may lead to a lack of adequate credit facilities and worsen the “Credit Crunch”.

The reason for the Credit Crunch is that reinsurance firms are not sufficiently capitalized to provide the insurance that banks and lending institutions seek to cover systemic risk. Additionally, the lower bond ratings ultimately reduce the value of the bonds held in Mortgage Backed Security (MBS) investment portfolios. Lower bond values means a weaker ROI for the reinsurer.

If the access to reinsurance is restricted for large credit facility packages, more capital needs to be raised to cover those positions, thus increasing the cost of the insurance to cover the risk factor.

The net result is that companies like AMBAC, SwissRE, and MBIA have a lower market cap and pay out the claims from toxic assets from 2007, 2008 and now retreat to safer investments.

In summary: to the consumer, all they see is that it is more difficult to get a loan and they may not understand why.