Industry’s Shadow Inventory of Distressed Homes Shrinks

Housing has become an industry afraid of its shadows. That shadow inventory of repossessed and soon-to-be repossessed homes has professionals from every side of the business worried about the impact such a sizeable volume of distress will have on property values and overall market fundamentals. But according to Standard & Poor’s (S&P), the obscurity hiding in the corner is getting smaller.

The analysts at S&P have issued a new report putting the shadow inventory into perspective. In the second quarter of 2011, the agency’s assessment of how long it will take to clear the supply of distressed homes in the U.S. fell for the first time since mid-2009, and it has S&P analysts asking, “Is it a sign of good things to come?”

The agency’s current estimate of time-to-clear the market’s distress is 47 months. That number represents a five-month decline from S&P’s first-quarter estimate and the largest quarter-to-quarter drop since mid-2008.

S&P estimates shadow inventory as all outstanding properties whose borrowers are 90 days or more delinquent on the mortgage; properties in foreclosure; and REO properties that are owned by the lender but have not yet been resold.

The agency also factors in 70 percent of properties on which the mortgage delinquency has been cured within the last 12 months on the basis that historical trends show “cured loans are more likely to re-default,” S&P says.

To calculate the months-to-clear the shadow inventory of distressed properties, the agency’s analysts look at the six-month moving averages of default, liquidation, and loan-cure rates across the United States.

S&P’s analysis uses loan-level data provided by CoreLogic on non-GSE residential mortgage-backed securities (RMBS). The agency says while its assessment of the shadow inventory “uses only non-agency data, we believe that the months-to-clear is similarly high for the market as a whole.”

While the volume of these distressed U.S. non-agency residential mortgages remains “extremely high” S&P says, the total volume of distressed loans has been falling since the beginning of 2010.

As of June 2011, this amount stood at $405 billion, the lowest level since December 2008. The agency’s latest assessment represents just under one-third of the outstanding non-agency RMBS market. At the end of March 2011, S&P put the distressed volume at $433 billion.

In tandem with S&P’s declining estimates of distress volume and months-to-clear the overall inventory, each of the individual top-20 metropolitan statistical areas (MSAs) the agency tracks reported lower months-to-clear estimates in the second quarter…

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