Latest Fitch figures show current shadow inventory at 7 million properties and these numbers are not expected to go down anytime sooner until first quarter of 2014 when they are projected to enter the market as investments.
Shadow inventory refers to properties whose homeowners are already in default, in danger of foreclosure or are Real Estate owned by lenders. Fitch based their assessment on current liquidation trend that shows an average of more than 40 months to dispose off distressed properties inventory.
Recent years have seen a widening of grace period for borrowers, but a longer foreclosure timeline could potentially result in higher fees and other costs which could lead to more aggravated losses for homeowners. Loan liquidations show that mortgage payments are spanning more than 18 months between payments by borrowers and this period has steadily increased over the last few years.
Fitch projects that based on monthly liquidation trends, it would take more than 40 months for these properties to enter the market for consumption by prospective buyers. The large inventory of properties awaiting foreclosures could also have adverse effects on government-backed residential mortgage securities performance.
The glut could be longer for states that require foreclosures, such as Florida but non-judicial foreclosure states like Nevada could take a shorter time resolving their inventory.
The prolonged foreclosure timeline could also cause home prices to further decline as demand for distressed properties continues to drop. Borrowers who are in trouble with their loans are also entering into loan modification programs, which expand the liquidation timeline. The recent paperwork fiasco may also be weakening buyers’ confidence in the industry.
Although the market is exhibiting interest rates at historical laws and properties have become cheaper, there are fewer buyers who can afford to take out new home loans due to stricter credit regulations. High unemployment rate and lack of consumer confidence in the market may also be preventing potential buyers from investing.