Shadow inventory volume has decreased progressively in the last several months, but it does not appear this portfolio of loans will fully clear for at least another couple of years.
In 2013, the volume of distressed non-agency mortgages dropped to less than half of what it was at its peak in Feb. 2010. As of Nov. 2013, $232 billion of non-agency mortgages remain in the shadow inventory, down from $495 billion in the beginning of 2010. However, since many of the non-performing loans in the shadow inventory have remained there for several years, their liquidation timelines – the pace at which servicers are able to close non-performing loans – have lengthened, according to a Standard & Poor’s Ratings Services report.
In order to clear the current shadow inventory, S&P estimates it will take around 51 months, which is 14 months longer than a year ago. The New York-based ratings agency computes this measure by dividing the total shadow inventory volume by the average monthly liquidation volume over the past six months.
“The overall volume of the shadow inventory has been steadily falling since 2010 because, since then, loans have liquidated or cured at a higher rate than new loans have defaulted,” S&P said in its report. “On the other hand, over the past year, the monthly volume of loans liquidated has fallen significantly, which is why we increased our estimate of how long it will take to clear the shadow inventory at current liquidation rates.”
A November CoreLogic shadow inventory analysis also determined that the national residential shadow inventory reached its lowest level since Aug. 2008 with 1.7 million properties, almost half of which are delinquent but not yet foreclosed housing units. This figure is down 24 percent on a yearly basis and represents a supply of 3.5 months compared to the previous year’s supply of 5.8 months.
“The shadow inventory continues to decline, decreasing at an average monthly rate of 46,000 units over the last year,” said Mark Fleming, the chief economist for CoreLogic. “Healthy market levels of shadow inventory are around 650,000 homes, so there is more to be done, but the trend is in the right direction.”
While fewer loans entered the shadow inventory through the first 11 months of 2013 than the same period of any year since 2005, some loans in this inventory continue to age, causing longer liquidation timelines. However, the significantly lower total volume suggests the shadow inventory obstacle is not as big as it once was, S&P stated.
Since so many mortgages defaulted between 2007 and 2009, where total loan balances steadily increased from approximately $10 trillion to $30 trillion before beginning to fall again, the loans that account for the shadow inventory have been non-performing for several years. Consequently, if you compare whether these loans were liquidated and measure the amount of time since they defaulted, it will constantly be on the rise.
“The results of our analysis showed that there was indeed a steep drop in the speed of liquidations beginning in 2007, as a loan that defaulted in 2005 had approximately a one-in-three chance to be liquidated within six months, while a loan that defaulted in 2008 had about a one in six chance to liquidate within six months,” the ratings agency’s report said.
Rick Sharga, the executive vice president at Auction.com, foresees the shadow inventory overhang being resolved by 2016, causing a more normal servicing atmosphere to also return.
“The overall shadow inventory will have no impact on home prices or sales until 2016 at the latest,” Sharga said. “The market will absorb what’s in the shadow inventory over the normal course of time.”
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