WEST PALM BEACH, Fla. -- When Frank Verna pulls up to a battered, four-unit apartment building at lunch hour, he's just over a mile as the seagull flies from the gated oceanfront palaces of South Florida's wealthiest.
But this stretch of 21st Street, pocked by homes with boarded-up windows and dead-ending at railroad tracks, is unlikely to make it to a tourism poster. Verna turns the car around in case he needs to make a quick exit and reaches into the center console for a Smith & Wesson M&P40. The real estate agent tucks the pistol into his jeans.
"Just watch your step," he says, pulling back the tangle of bushes grown across the building's entry path. Beyond is the darkened doorway to Unit 1 -- missing its door.
"I think there's a dead animal over there," says Verna, traces of New York's Queens still present in his accent despite two decades in the Sunshine State. He aims his flashlight at a mat of brown fur in the center of a living-room floor blanketed in garbage. The stench of whatever's in there is already potent and the summer heat is still months away. Nobody is home.
Verna is here because he specializes in distressed properties and Florida, thrashed by the mortgage and foreclosure disaster, has thousands of them. But figuring out just how many is not so simple.
Each month, analysts issue reports detailing the number of homes nationwide in foreclosure or held by banks. The implication is that if we can just find a cure for these loans and homes -- either by matching buyers with houses or helping the borrowers stay put -- the economy will be able to heal at last.
At ground level, though, it's more complicated. The building on 21st Street is a good example.
The last buyer paid $309,000 for this place six years ago. But today the county appraiser says it's worth less than a quarter of that amount. A bank filed foreclosure papers against the owner in 2008, but a year later withdrew the case. Legally, it still belongs to the original owner, subject to fines and liens by the city. But the bank sold the underlying mortgage note to a hedge fund for pennies on the dollar. That company has hired Verna to check the condition and occupancy status of its investment, on the way to making it profitable (His research indicates the owner has left the country.)
It's one thing to take measure of the foreclosure crisis in the black and white of statistics. But here's a reminder that reality also comes shaded in gray.
People in the foreclosure trade have a name for buildings like the one on 21st Street: "shadow inventory." Broadly speaking, it refers to all the homes in the foreclosure pipeline that will eventually flow in to the market but aren't there yet. In practical terms, the definition of shadow inventory varies considerably depending on which analyst you ask, and there is truth to be gleaned from each of their carefully calculated studies.
Numbers matter because figuring out how long the crisis will last requires knowing the extent of the damage. But if we're going to take stock of the nation's progress in working its way through the mortgage debacle, reading reports may not be enough.
The only way to fully comprehend what's going on out there is to wade into the wreckage. And to do that requires moving beyond the figures and the charts, and venturing into the shadows.
Cases in court
All rise and come to order. Judge Diana Lewis' court is now in session. On a Monday afternoon, the three rows of benches in Courtroom 4B are packed. Lawyers and home owners who weren't early enough to snag a seat cluster around the doorway and stand along the walls.
The lawyers are the ones in the suits who look like they belong. The borrowers are the ones in T-shirts and sneakers, clutching overnight-mail envelopes stuffed with fraying documents, looking around nervously like maybe they've already missed something. Taped to a white board in the lobby, 16 sheets of paper list the 136 foreclosure cases scheduled to be heard in Judge Lewis' courtroom on this one afternoon.
Too late for a seat, Leanna Lalla, a lawyer representing homeowners, leans over to explain that today's crowd in 4A is merely the norm, reflecting all those houses piling up in the pipeline.
"Do you see the shadow yet?" she whispers.
Florida, home to a quarter of all the nation's foreclosures, is one of 20 states that rely entirely on the courts to deal with the crisis and the system is overwhelmed. A big part of the reason cases drag on for an average of two years is that last year's robo-signing scandal forced banks to put the brakes on many cases with suspect documents. A settlement with state and federal officials has allowed the process to get moving again.
But the proceedings in Lewis' courtroom hint at the confusion, as well as delaying tactics by both lenders and borrowers, leaving scores of homes stuck in the pipeline.
One of the first cases Lewis calls is Wells Fargo v. Killgore. The lawyer for a condo association steps forward, pursuing $15,000 in unpaid dues and fines on a Boynton Beach apartment in foreclosure. But a woman named Sue Elmore objects. Elmore is the daughter of the man who lived in the condominium at the heart of this case. She tries explaining to the judge that her father has Alzheimer's disease and now lives in a nursing home. Years ago, he took out a reverse mortgage on his home and when he got ill, the family agreed to surrender it to the bank, a deal they thought was long done.
"In our minds, we didn't own it any more. We gave it back," Elmore says later. "We just did what they told us to do."
Maybe someone forgot to tell the bank. Because the condo that the family thought they no longer owned is still listed in their name on the tax rolls. It's not clear exactly how a home like this one should be classified or what it will take to figure out a solution.
Later, Lewis calls up the parties in another case, Nationstar Mortgage v. Sands. The homeowner tells the judge he thought a loan modification had been finalized, allowing him to keep the home, until a lawyer called to say it was back in foreclosure. "That's ridiculous," Lewis tells the lawyer for the bank. "I'm not doing this thing two or three times. You're making my head spin."
From the courthouse, it's a 15-minute drive to a neighborhood called Eden Place -- a scene that is much more peaceful. On alphabetically named streets, well-tended, if modest homes built a half-century ago snuggle amid tropical foliage. But it's not the same paradise it was 15 years ago when Jimella McKeag fled Pennsylvania winters for a pink stucco refuge on J Street.
"That one on the corner, he didn't pay his mortgage. He just moved out to Okeechobee and let it go," McKeag says, surveying the block from a plastic Adirondack chair beside her front door. "This one here, he rented it a couple of times. ... He let it go and it went back to the bank."
Of the 13 houses on McKeag's block in Lake Worth, two are currently owned by banks after going through foreclosure. But neither is listed for sale. On this afternoon, a crew of three men is hauling mildewed mattresses and a sofa out of one of them; its living-room ceiling has caved in from leakage despite a blue tarp covering its roof. At the opposite end of the block sit two more homes that are clearly abandoned, but whose fate remains unclear. One was bought out of foreclosure by a local doctor last fall, but appears uninhabitable. The other, boarded up, still belongs to its original owner.
At the peak of the market, houses on this block sold for $250,000 or more; they've lost at least half their value. One day, these vacant homes will come out of the shadows and on to the market, affecting the worth of neighboring houses. Analysts pore over data trying to figure out just how many homes like this are hidden from view. But it's not easy.
Economists at CoreLogic, a California company that analyzes mortgage data, weigh in at the low end, charting 1.6 million homes in shadow inventory nationwide. They count homes not listed for sale. Others say the shadow is much bigger. Laurie Goodman of Amherst Securities in New York says it covers from 8.3 million to 10.4 million homes. "The question is how long is the shadow?" Goodman says. "I think some people are definitely underestimating the seriousness of the problem."
Mark Fleming, chief economist for CoreLogic, says his analysis is a snapshot of the problem at the moment, while Goodman's is more of a forecast. "In many ways, we can both be right," he says.