February 10th, 2011 11:00 AM by Lehel S.
he volume of distressed nonagency residential mortgage properties in the U.S. continues to fall, but at an ever-slowing pace. Standard & Poor's Ratings Services currently estimates that the principal balance of these distressed homes amounts to about $450 billion, representing nearly one-third of the nonagency residential mortgage-backed securities (RMBS) market currently outstanding. We define this yet-to-be absorbed "shadow inventory" of distressed properties as outstanding properties whose borrowers are (or recently were) 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REO).
At the end of fourth-quarter 2010:
Overall, the value of the Federal Housing Finance Agency (FHFA) home price index indicates that home prices have fallen 20% from their heights in early 2007. Moreover, prices are likely to fall further as the distressed properties comprising the inventory are sold and the backlog clears (see chart 1).
Prior to first-quarter 2008, in which our estimates of months to clear the shadow inventory reached peak levels, the increases in months to clear were primarily attributable to sharp increases in overall distressed property levels that resulted from higher default rates. However, our recent estimates of months to clear have increased primarily because of the deceleration of the distressed property liquidation rate rather than a rise in overall distressed property levels (see chart 2). Our estimate of months to clear for the overall U.S. market has increased by five months since the third quarter.
Liquidation rates are falling in part because of increasing timelines for resolving troubled assets. Relative to the volume of distressed properties overall, REO assets, or those that are bank owned, remain at minimal levels (see chart 3). It seems that 90-plus-day delinquent loans and foreclosed properties are taking longer to become REO, which is lengthening the overall timelines for resolving troubled assets.
Despite the size of the shadow inventory, some of the recent news is good: