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Servicing

Shadow inventory decline begins to accelerate

Linked to drop in 90 days+ past due loans

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With its largest quarter-over-quarter drop since the credit crisis began, shadow inventory fell from 3.28 million loans in the first quarter of 2013 to 2.99 million in the second quarter, a 35% drop on an annualized basis, according to broker/dealer Compass Point Research & Trading.

“The shadow inventory is quickly being worked off and is no longer a significant weight on the housing market in most parts of the country. The key exceptions would be pockets in Florida, parts of the Midwest, and the middle Atlantic,” Moody’s Analytics Chief Economist Mark Zandi told HousingWire.

Year-over-year, shadow inventory fell 23%, marking its largest drop ever. This fall was largely linked to an accelerated decline in 90+ past due loans, which dropped 20% year-over-year compared to 11% last quarter. At one point, the shadow inventory was believed to be a huge drag on housing, preventing a recovery. As HousingWire reported in 2010, Standard & Poor's correctly predicted that it would take three years for this phenomenon to pass.

According to data compiled by the Mortgage Bankers Association and Bloomberg shadow inventory hovered at 5.5 million loans at its peak in March 2010. In March 2000, shadow inventory loans totaled an estimated 800,000, significantly lower than current levels. Foreclosures and 90+ day past due loans have followed the shadow inventory trend very closely.

The push in declines of 90+ past due and foreclosure inventory is expected to continue as servicers push to resolve delinquent inventory.

“For most of the country, delinquencies and foreclosures have returned to more normal historical levels. Most states are at or only slightly above longer-term averages, and some of the worst-hit states are showing improvement,” the MBA stated in its latest delinquency report.

“In addition to that, the thing that would probably be a factor is the modification efforts under the various programs that would take someone, even if they’re delinquent, current,” said Doug Duncan, chief economist of Fannie Mae.

“Improvement in house prices have created a stronger incentive for people in trouble to try and repair their situation because they could have some equity at stake,” he added.

According to Zandi, the improvement in mortgage credit quality is a large factor driving the decline in shadow as well. “Lower unemployment, higher house prices, and tight underwriting has resulted in record low early stage delinquency. This is finally resulting in better late stage delinquency. Continued loan modifications and strong demand for REO is also resulting in fewer homes in the foreclosure pipeline,” he said.

Zandi noted that one potential concern recently is the increase in homes being listed by investors. There are even some anecdotes of flipping, said Zandi. “This is not yet a problem, but bears close watching.”

Fannie’s Duncan added that there are things like short sales or pre-foreclosure sales that are executed to the benefit of the lender, investors and borrower that will help as well.

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