Early 2011 numbers are showing a greater impact from the foreclosure processing and documentation scrutiny banks are currently under. This will result in a longer â€œhangingâ€ period of the foreclosure and REO inventory. For example, while foreclosure sales (moving of loans from the foreclosure inventory to REO status) topped out at over 120,000 a month before the documentation scrutiny began, they are currently down to about the 65,000-80,000 range.
Another interesting occurrence resulting from the foreclosure documentation and processing scrutiny is the recycling of loans previously in foreclosure inventory back into the seriously delinquent inventory. As LPSâ€™ decomposition of seriously delinquent inventory shows, over one-third of that inventory are loans 12 or more months delinquent; a third of those are 24 months or more delinquent. The share of seriously delinquent loans grew by 172 percent over the last year. Another indication of the recycling of previous foreclosure inventory is that 35 percent of foreclosure starts are actuallyÂ repeatÂ foreclosures; this share has been consistently rising since the last summer.
What does this all mean for the shadow inventory? In short, there is still a lot of it out there. There are currently a little over 3 million loans in the shadow inventory. This number includes all loans in the foreclosure inventory and a share of delinquent loans. It also includes delinquent loans that are anticipated to enter foreclosure over the next year. These â€œnew entrantsâ€ account for about one-third of the 3 million shadow inventory estimate. The loans excluded (i.e., subtracted) from the shadow inventory are those serious delinquencies already listed for sale and modifications.
Over the past year, distressed sales have accounted on average for 34 percent of existing home sales. If this trend continues, current shadow inventory would take about 16 months to clear. This figure naturally varies significantly among the states. But also, the share of distressed sales has been growing in recent months. The NAR's REALTORÂ® Confidence Index shows increases in distressed sales from 37 percent in January to 40 percent in March. At the March rate of 40 percent, shadow inventory would clear in 14 months.
When comes to shadow inventory, there continues to be many moving pieces which affect the way in which shadow inventory may clear. One issue that could have the most impact is banksâ€™ handling of foreclosures and how that will play out. Another continuing issue is the number of homeowners who are â€œunderwaterâ€ and the likelihood of whether or not they will walk away from their mortgages. And there are still a number of Option ARMs scheduled to reset in 2011 and 2012. With tightening of lending rules, these homeowners may have a more difficult time refinancing their loans into more favorable terms.