S&P Estimates a Three-Year Overhang of Shadow Inventory

Good news... this was an article in todays DSNews.com. Sounds like plenty of opportunity for us DGers.
Oly

That looming shadow of housing inventory that’s graced so many headlines lately has put the entire industry on edge. And that uneasiness was validated in a report published by Standard & Poor’s (S&P) Tuesday. Theratings agency said this hidden supply of REOs and pending foreclosures will likely take 33 months – or nearly three years – to clear if liquidation rates hold steady.

Even more unsettling is that S&P called its estimate “conservative” because the company’s analysis was based on the number of properties the company believes to be lurking in the shadows right now – repossessed homes that banks have not put on the market and already delinquent mortgages that will likely turn into foreclosures. S&P’s assessment does not take into account any loans that have yet to show serious signs of distress.

“We believe that in reality additional loans will default in the near future due to the weak economic environment, distressed residential home values, and the resulting contraction in the supply of mortgage finance,” further increasing the overhang of the shadow inventory, S&P said.

The ratings agency did not give a specific number of loans in its calculated shadow supply, but said the original balance of currently seriously delinquent and REO loans
stands at $426.3 billion. An earlier study by Amherst Securities estimates the dark cloud to hold about 7 million loans, while First American CoreLogic puts it at 1.7 million.

Analysts at Standard & Poor’s said in the report, “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.”

In summer 2009, the S&P/Case-Shiller Home Price Index rose for the first time in two years. Since May 2009, the index has risen by over 3 percent, suggesting that the necessary correction to U.S. residential home prices is nearing an end. But S&P analysts say not to sound the trumpets so fast. The mortgage crisis is far from over, they warn, and the overhang of homes heading toward liquidation suggests more delinquencies and lower home prices are to come.

“We believe that the recent reversal in housing prices is the result of a temporary constriction in the supply of foreclosed homes on the market,” said Diane Westerback, managing director of the global surveillance analytics division at Standard & Poor’s. “This temporary constriction ensued because servicers have completed fewer foreclosures due to court delays, servicing backlogs, and political pressure to keep borrowers in their homes,” she said.

The growing number of borrowers who are delinquent but haven’t been moved into foreclosure is only adding to the ominous shadow inventory, S&P said, and will ultimately exert further downward pressure on property values and reverse the small gains that have been made.

S&P’s conclusions are similar to findings published by Moody’s Investors Services this week. The firm says it expects foreclosure delays from the government’s Home Affordable Modification Program (HAMP) to depress home prices another 8 percent over the course of this year.