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.
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, with loans that are at least 90 days overdue, in foreclosure or bank-owned.
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. Goodman's analysis includes homes with loans that are at least 60 days overdue, have been delinquent in the past and are likely to go into default again, and thousands of homes whose owners are making payments but are likely to give up because they are so far "underwater," in homes worth less than they owe.
"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.
The difficulty of trying to measure shadows becomes more obvious the further you go down J Street. A couple of blocks south of McKeag's house, more homes are cut into rental units and there are fewer trees. More homes are empty here, some marked with "No Trespassing" signs posted by the sheriff's office. But the houses that are occupied are the most difficult to figure.
Take a two-family home with a carport in the 1400 block. According to county records, it has gone through foreclosure and is now owned by the Federal Home Loan Mortgage Corp. But tenants say they are still paying rent to the previous owner. There are scores of homes like this, experts say, owned by lenders who have yet to pursue an eviction of borrowers who are not making payments.
Lenders have good reasons to delay. Empty homes require upkeep. Once banks claim a home, they are responsible for the taxes and fines from cities and homeowner's associations. The loss on the loan goes on to their books. As long as a case in still in process, loan servicers continue to collect their fees.
A recent check of records in this one county found more than 10,000 cases in which a bank secured a final judgment more than a year ago, yet there has still been no change in title, says Michael Olenick, a West Palm Beach computer programmer who tracks the system.
Then there are houses like the white one in the 1300 block of J Street where Peter Gardner answers the door. Gardner, a former laser technician, bought this house for $44,000 in 1995. After a car accident left him disabled four years ago, he says he fell behind on his payments and tried repeatedly to work out a catch-up plan, borrowing enough money from his mother to cover the money owed, but not late fees. This is a variation of accounts often heard from borrowers and lawyers who represent them _ for years, banks waited until people fell behind, then began imposing heavy late fees, while refusing to give ground.
Gardner, who says he hasn't made a payment on his loan in years, thought about selling. A real estate agent advised listing it for $275,000 to get a quick sale. But he resisted. The lender began foreclosure proceedings three years ago. Gardner asked for a loan modification, but every three months the bank told him he needed to reapply. Finally, last fall, the house went to auction. The lender claimed it for $500.
The story doesn't end there.
The home is owned by a subsidiary of Bank of America. Gardner expects to be evicted one of these days. In the meantime, though, employees of the bank still call every few weeks to tell him he's behind on his payments and responsible for the house. "They want me to live in the house, mow the lawn, keep the air conditioning on so the fungus doesn't grow in it," Gardner says. He keeps telling the bank employees that he no longer owns the place, but they don't believe him.
"Somebody went and sold my house and they're telling me I'm not even in foreclosure," Gardner says, standing in the driveway he no longer owns, but where he still parks. "I was mad crazy with it and every time you just have to laugh. Otherwise, you'd just kill yourself inside."
The housing market is working through a riddle, trying to determine what homes are worth given limited demand. But shadow inventory keeps part of the supply hidden.
"It goes deep and you have no clue," says Danielle Giunta, who checks up on distressed homes on behalf of lenders. Giunta sold real estate until the market tanked. But she's repurposed herself for the times. Now, a few days a week, she drives a 120-mile route through six Palm Beach County zip codes, knocking on doors, noting broken windows or water damage and snapping pictures. She usually spends just a few minutes at each house and earns a few dollars per stop.
"The first few weeks I worked, I was very depressed," Giunta says. Part of it was all the vandalism and garbage she came across. Other times, it was the conversations with families certain they were about to evicted. But, as an agent who stills watches the listings, she was also bothered by the difference between the number of homes for sale and all the others she was seeing.
"I go online and see what they're reporting and it's not the same," she says. "It's not going to be better for years ...and the reason I say that is the truth is not out yet."
There is, however, substantial demand for foreclosures at the right price. Driving through inland neighborhoods, agent Sharon Restrepo slows to point out small houses and condominiums. In a development called The Forest, she stops in front of a condo she bought for $30,000 a few months ago and resold to an investor for $40,000. After the investor paid $1,600 to fix it up, the place now rents for $950 a month. Restrepo says she's buying five to 10 homes like this a month, turning most around as profitable rentals. You can't build these houses for what they cost, she and others say.
But investors and those who represent them complain banks are not realistic about the prices they'll accept. Verna, the real estate agent specializing in distressed properties, says that slowing the flow of homes into the market creates an artificially low inventory in some neighborhoods, which can temporarily lift prices. At the same time, lenders are increasingly selling homes or the underlying loans in bulk to hedge funds.
That's where Verna comes in, tracking down borrowers to convince them to trade deeds for cash, and turning around homes like the building on 21st Street for resale. This takes patience and a strong stomach. Abandoned homes are frequently trashed or occupied by squatters. Borrowers are difficult to track down and reluctant to talk.
Verna has tracked one homeowner from address to address to address. Each time the real estate agent thinks he's caught up, the man has moved again.
At this rate, Verna figures it will be three to five years before lenders let all the homes go. The risk is that, by moving too slowly they could artificially raise prices in some areas, which might spur investors who bought homes as rentals to put them up for sale.
"The truth of the matter is we would have already gotten over it if they just let the properties get out there and get sold," Verna says. "So what are you doing? You're not stabilizing the market. You're creating more chaos."
When Lynn Szymoniak moved to South Florida three decades ago as a lawyer for migrant farm workers, the land stretching west along Lantana Road was planted with cash crops. Today, a Home Depot store has taken over a tomato field. And what was once a U-Pick farm is now a neighborhood of 262 homes called Strawberry Lakes.
"Sometimes you can't tell when a house is in foreclosure unless you go back two or three times, because the neighbors will do things like park their cars in the driveway, all in an effort to make things more secure," Szymoniak says, driving slowly through the subdivision.
She points out houses with waterlogged newspapers piled on front steps and fabric hung across windows. One of her "favorites" is a house whose shingled roof has worn a blue rain tarp so long it has disintegrated to fringe, hanging from the eves like a monk's haircut.
"But one of the things you may have noticed," Szymoniak says, "is that with all these foreclosed homes we've come upon, we've come upon zero `For Sale' signs."
Szymoniak hasn't counseled farm workers since the 1980s. But she found her way to Strawberry Lakes after battling to keep her own house. In 2008, Deutsche Bank filed foreclosure papers against her. By then, Szymoniak had spent years representing insurance companies in fraud cases and she'd become expert in spotting deception. She took note of suspect signatures on loan documents. Her detective work was instrumental in exposing the robo-signing scandal, reflected in $18 million awarded Szymoniak as part of the recently announced settlement between major banks and government officials.
Szymoniak's frustration, though, extends well beyond what happened with her loan. She is convinced banks still are not doing enough to resolve the crisis. She points to Strawberry Lakes as Exhibit A.
The two- and three-bedroom homes here now sell for just a third of the $275,000 or more they fetched at the top of the bubble.
Few of the neighborhood's homes are owned by lenders. But many bear stickers on doors and windows, posted by banks and loan servicers with a vested interest in their fate. "This property is managed by Chase," reads one, at a home on Strawberry Lakes Circle. A look through the window reveals a dining room ceiling that is caving in.
At least three dozen homes are currently in foreclosure, with many cases dating back three or four years. Of those, at least five are houses where lenders won final judgments years ago, but have not moved forward.
In addition, at least 57 houses not in foreclosure are owned by people who paid far above what they're now worth.
Prudent Alcindor, who paid $253,000 for a house currently appraised at less than $112,000, says he thinks often about whether to give up.
"I still pay, but I will never have the house. I pay to stay in it. But it will never be mine. It's like I rent it," says Alcindor, who works at a vitamin manufacturer. The financial pressure on his neighborhood is "getting worse and worse every day."
It's hard to know how others are doing in paying their loans. But Jeremy Vassalotti, president of the homeowner's association, points out that as his neighbors have fallen behind, more responsibility lands on everyone else. Vassalotti, who owns a masonry company, lives in one of the neighborhood's most carefully tended homes, with cast iron dragonfly sculptures on the walls by the entryway and stone frogs set amid the cedar chips.
But he spends substantial effort now trying to keep up with what's going on at the houses around him. In Strawberry Lakes, 105 of the homeowners are behind on their payments to the HOA, a hint that more of them could be headed to foreclosure.
That uncertainty makes it difficult to measure the reach or duration of the crisis. But Szymoniak cautions against assuming that, just because the streets here are peaceful and the grass in front of the empty homes kept trimmed, the problem is going away.
"You know," she says, pointing out yet another vacant house, "when anybody tells me we're coming out of the foreclosure crisis, I always take them for a ride and let them see what's happening" in neighborhoods like this one _ bathed in South Florida sunshine, but set deep in the shadows.
Adam Geller, a New York-based national writer for The Associated Press, can be reached at features(at)ap.org