REO Homes Will Lead To Years Of Excess Supply

According to a recent report, Standard & Poor analysts predict that it will take nearly three years for the shadow inventory of bank repossessed properties to clear. With …

According to a recent report, Standard & Poor analysts predict that it will take nearly three years for the shadow inventory of bank repossessed properties to clear. With nearly three-fourths of cured loans expected to re-default, and the US HAMP performance underwhelming, many experts believe that housing prices will drop again in 2010. See the following article from HousingWire for more on this.

The “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate, according to a report from the credit rating agency Standard & Poor’s (S&P). The analysts add that during this period many servicers will likely shift their emphasis from mortgage modification to loan liquidation.

The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation. As for the total amount of homes in the shadow inventory, Amherst Securities places the total at 7m. The Royal Bank of Scotland found 2.7m, and First American CoreLogic counted 1.7m.

S&P estimates the inventory to equal a 33-month supply of homes. Analysts added the estimate is actually conservative, as they did not assume homes not showing signs of distress would default and push the overhang of supply even further.

Furthermore, court delays, political pressure and servicing backlogs constricted the flow of foreclosures hitting the market to a trickle. These delinquent borrowers who have not received a foreclosure fuel the “rapidly” growing shadow inventory of properties, according to the report.

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“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,” according to the report.

Another credit rating agency, Moody’s, showed that the underwhelming performance of the Home Affordable Modification Program (HAMP), which the US Treasury Department launched in March 2009 to give incentives to servicers for the modification of loans on the verge of foreclosure, will drive down housing prices another 8% from Q409 to the end of 2010.

According to the S&P report, homes are falling into serious delinquency faster than REO transactions are closing. The total balance of seriously delinquent loans reached well over $400bn through November 2009, while the balance of REO properties reached its peak in September 2008 and declined to $50bn. On average, $14.5bn of seriously delinquent loans or REO property liquidates each month. According to the report, it will take 29 months to clear this supply of homes:

The other four months worth of supply comes from re-defaults on delinquent loans currently cured – or brought back to current status through a loan modification. Following current trends, S&P analysts predict that 70% of the cured loans will re-default. The total balance of these re-defaulting loans and the current amount of serious distressed loans will reach $473.4bn, nearly 30% of the total outstanding balance on all privately securitized loans.

With the launch of HAMP, servicers shifted strategy from liquidation to modification. The amount of loans that progressed from seriously delinquent to REO fell to 28% in Spring 2009 from 58% in June 2008. In that time, seriously delinquent loans that cured went from 32% to 58%, according to the report. But analysts found that this shift was only temporary.

“We believe that the recent constriction in the supply of foreclosed homes on the market is a temporary one,” claim the analysts.

“Loan modifications and the observed extension of time distressed loans remained as such may simply have delayed the inevitable, creating the demonstrated shadow inventory of troubled loans,” they wrote. “Ultimately, the majority of the properties these distressed loans represent will likely have to be liquidated.”

This article has been republished from HousingWire. You can also view this article at
HousingWire, a mortgage and real estate news site.


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