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Judicial States Bloat U.S. Shadow Inventory

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While the nation’s pool of distressed loans remains historically high, there have been some positive signs with the shadow inventory. Hurting the numbers are states that require judicial foreclosures, where it takes two-and-a-half times as long to clear out non-performing mortgages as it does in non-judicial states. The problem is much worse in the Big Apple — where the distressed supply would take far more than a decade to clear.

In 2005, it took between 20 and 30 months to clear out the inventory in states that require foreclosures to be processed through the court system. As of the first quarter of this year the number of months to clear out shadow the inventory in judicial-foreclosure states was 84 and trending higher.

Shadow inventory includes properties with mortgages that are at least 90 days delinquent, in foreclosure or real-estate-owned as well as 70 percent of all loans that have been at least 90 days past due during the last 12 months, according to Standard & Poor’s Ratings Services’ First-Quarter 2012 Shadow Inventory Update: National Liquidation Rates Moderate, While Regional Differences Widen. The report is available to Ratings Direct subscribers at www.globalcreditportal.com.

In non-judicial states, the average was also in the range of 20 to 30 months back in 2005 but only sits at 35 months now.

The U.S. average, regardless of the type of liquidation requirements, was 46 months as of the first quarter, easing from the prior quarter’s 47 months and improving from 52 months during the first-quarter 2011.

The report indicated that the size of the shadow inventory had been growing as a result of low liquidation rates during the past two years.

“Although our analysis of the shadow inventory uses only non-agency data, we believe that the months-to-clear is similarly high for the market as a whole,” the report said. “Long liquidation timelines and the accumulation of so many distressed loans are due in large part to rising court delays in foreclosure proceedings, a problem that plagues agency and non-agency loans indiscriminately.

“As long as these delays continue, the shadow inventory remains a market-wide threat.”

Still, according to the New York-based ratings agency, the volume of distressed non-agency mortgages has declined each quarter since mid-2010 and stands at the lowest level since August 2008.

In addition, the rate that new properties are entering the shadow inventory was the slowest it’s been since May 2007. S&P noted that the positive development means the size of the shadow inventory will be determined by the speed at which servicers can liquidate or cure non-performing loans.

Data from the report indicates that out of 4,205,971 privately securitized home loans outstanding as of March 31 for $1.120 trillion, those classified as distressed and included in the U.S. shadow inventory totaled 1.3 million loans for $354 billion in the first quarter — a level that S&P described as “extremely high.”

In 2005, the shadow inventory was less than $50 billion.

The first-quarter 2012 number worked out to a rate of 31.603 percent on a dollar basis and 31.625 percent on a number basis.

While the current U.S. rate is running high, the rate is supercharged in the city of New York — where it would take 202 months to clear out the shadow inventory as of the first quarter. A distant second, based on the 20-biggest U.S. markets, was Boston’s 86 months.

Both New York and Massachusetts are judicial foreclosure states, according to CoreLogic, which supplied S&P with the raw data.

On the low end was Phoenix, where the shadow inventory was just 15 months. Arizona is a non-judicial state.

An analysis of S&P’s data indicates that 1.4 million mortgages for $0.358 trillion were at least 30 days delinquent as of the first quarter. Delinquency of at least 30 days was 25.048 percent on a dollar-balance basis and 25.171 percent using the number of loans.

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