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Time to Clear Distressed Inventory Worsens

Although the number of properties in the nation’s distressed inventory has fallen, longer liquidation times have increased the number of months it would take to clear out the inventory.

The inventory of distressed properties that secure loans included in residential mortgage-backed securities was 949,000 in the second quarter.

The distressed inventory has decreased by 6.5 percent from three months prior and was down 21 percent from a year prior.

Distressed inventory includes securitized first mortgages that are either at least 90 days past due, in foreclosure or real estate owned. It also includes half of the securitized loans that had been 90 days delinquent but were cured or modified during the past 12 months.

Morningstar Credit Ratings LLC reported the findings in the Q2 2013 Morningstar RMBS Distressed Inventory Index: More Time Required to Clear Distressed Pipeline amid Fewer Short Sales and More Loan Modifications.

The ratings agency utilized data sourced from CoreLogic’s loan-level, non-agency RMBS database.

“Declines in the number of properties entering the distressed inventory and the continued liquidation of distressed inventory are factors contributing to the steady decline in distressed inventory,” Morningstar said. “Fewer properties are entering the distressed inventory as a result of improved loan performance as the monthly new delinquency rate has continued to fall since the first quarter of 2013.”

But despite the decline in the number of distressed properties, the expected time to clear the distressed inventory increased to 41 months from 40 months three months earlier and was up by three months compared to a year earlier.

The disparity reflects “much slower liquidation rates.”

In judicial states, it will take 59 months to clear the distressed inventory, while the number of months in non-judicial states is just 29 months.

The six worst states for distressed inventory rates — New Jersey, Florida, New York, Illinois, Maine and Connecticut — are all judicial foreclosure states.

Distressed inventories have seen the biggest year-over-year declines in the Metropolitan Statistical Areas of Phoenix-Mesa, San Diego, San Francisco, Detroit and Denver.

Although the share of short sales was increasing in the first-quarter report, a “surprising decline” was noted in the second quarter. But loan modifications are rising.

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