A shadow inventory means clearing the market of distressed homes. According to Standard & Poor’s Rating Services such an operation would take approximately 46 months. The agency’s results were based on progresses done in the first quarter data in 2012 and in the fourth quarter data of 2011.
Meanwhile, mortgages made on residential estates appeared to be relatively stable in the first months of the year, only with small variations dependent on flux of the local markets. Any significant reductions are tried to be prevented in order to maintain a balanced situation. In general, the regional variations are dependent on how fast can the services dispose of the backlogs of nonperforming loans, which are a result of the existing differences in the foreclosure procedures. These procedures may present delays due to the judicial versus non-judicial processes involved. The agency estimated that in the first quarter of this year the judicial states were about 2.5 longer than the non-judicial states.
In addition, S&P develops a shadow inventory on all existing proprieties that feature delays in mortgage payments of over 90 days, and on proprieties that cope with the danger of foreclosure, or that are REO. Also, it includes up to 70 percent of the loans that became “cured” or current from the 90 day delinquency in the last twelve months. This happens because, according to S&P, they are more probable to re-default.
The agency makes all the calculations relying in the ratio of the total volume of distressed loans related to the six-month moving average of liquidations. Regardless its analyses, the shadow inventory make use only of data that is not acquired by the agency itself, and S&P analysts consider a month-to-clear to be similarly high for the market seen as a whole.
Furthermore, the amount of distressed non-agency residential mortgages is still unexpectedly high, rating $354 billion in the first quarter of the year. Despite this, the agency is aware that the general distress volume has declined greatly since 2010. For the agency to be able to put the shadow in perspective, S&P bases its results on the original balances of loans and states that the numbers are less than one-third of the existing non-agency residential mortgage securities market in U.S. Also, it considers the New York City’s metropolitan statistical area that has had the highest months-to-clear in the nation in 202 months.
Moreover, the agency’s monthly first default dropped to 0.67% in March 2012, which represents the lowest level since May 2007. The first default rate represents the percentage of loans that becomes 90-plus-day delinquent in a certain month for the first time. It is a percentage of all loans that have never been presented delays over 90 days before. In this case, the propriety enters automatically in the shadow inventory at a much slower rate. The only improvement done is made in the speed of the services that liquidate the nonperforming loans, and which will determine if the shadow inventory continues.
Since the first quarter of 2009, the default rates have lowered and an average national rate has been settled. Anyhow, it is inevitable for the shadow inventory not to have a great impact on the market.