Shadow Inventory Of Troubled Mortgages
From Standard and Poors, February 16, 2010.
“The Shadow Inventory Of Troubled Mortgages Could Undo U.S. Housing Price Gains”
“In summer 2009, the seasonally adjusted S&P/Case-Shiller Home Price Index rose for the first time in virtually two years. Since May 2009, the index has risen by over 3%, suggesting that the necessary correction to U.S. residential home prices is nearing an end. However, in Standard & Poor’s Ratings Services’ view, the mortgage crisis may be far from over. The overhang of homes heading toward liquidation suggests more delinquencies and lower home prices are to come.
The current “shadow inventory” (including all delinquent loans, not only those that are real estate owned [REO]) of troubled mortgages will likely take about 33 months?or nearly three years?to clear at the current rate of liquidations. Moreover, we believe this estimate is conservative, as we do not assume any loans that have yet to show any serious signs of distress to date will default in the future and further increase the overhang of homes. Nonetheless, we believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance.
We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market. This temporary constriction ensued because servicers have completed fewer foreclosures due to court delays, servicing backlogs, and political pressure to keep borrowers in their homes. However, there is a rapidly growing shadow inventory of properties where borrowers are delinquent but foreclosure has not been completed. Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market.”
“A Swelling Number Of Distressed Loans Creates The Shadow Inventory
The monthly balance of distressed loans currently outstanding relative to the monthly balance of those that pay off, or close, suggests that there is a growing shadow inventory of loans that need to undergo the closure process. In January 2005, the balance of distressed loans outstanding was about 18x that of distressed loans that closed. Today, the balance of outstanding to closed distressed loans has increased to about 31x (see chart 2).”