Shadow Inventory: Almost 4 More Years to Clear Distressed Housing Supply

According to estimates provided by Standard & Poor’s Rating Services, it will take 46 months, close to 4 more years, to clear the market’s supply of distressed homes, or “shadow inventory” based on first-quarter 2012 data.

After the end of the first quarter of 2012, S&P stated its months-to-clear estimates in judicial states were almost two and a half times as long as non-judicial states.

They went on to explain that while the national residential mortgage liquidation rates appeared stable over the first three months of 2012, these rates did vary widely between local markets, which prevented any major reduction in their months-to-clear estimate.

The major differences in how quickly a servicer can clear their sheet of nonperforming loans are greatly based on the differences in foreclosure procedures whether non-judicial or judicial. S&P included all outstanding properties where mortgage payments are at least 90 or more days delinquent, properties currently in foreclosure process and properties that are currently bank owned REO’s. They also included 70% of the loans that became current, or “cured,” from their 90-day delinquency within the past 12 months. They included these loans because statistically these cured loans are more likely to fall into default once again.

S&P’s calculation of the months to clear the shadow inventory was by using the ratio of the total volume of distressed loans to the six-month moving average of liquidations. Although S&P’s analysis of the shadow inventory uses only non-agency loan data, the agency’s analysts believe the months-to-clear is similarly high for the market as a whole. The volume of these distressed U.S. non-agency residential mortgages (which excludes loans from government sponsored entities, such as Fannie Mae and Freddie Mac) remained extremely high at $354 billion in the 1st quarter, but overall the industry’s distress volume has declined in each quarter since mid-2010.

According to S&P, this latest number, which is based on the original balances of the loans, represents slightly less than one-third of the outstanding non-agency residential mortgage-backed securities (RMBS) market in the United States. S&P also reported that the U.S. monthly first default rate fell to 0.67 percent in March 2012, the lowest level since May 2007. This means that properties are entering the shadow inventory at a slower rate. S&P says with this improvement, the speed in which servicers can liquidate or cure nonperforming loans will determine the size of the shadow inventory in the future.