RealtyTrac Senior Vice President Rick Sharga said major banks currently hold roughly 1 million REO, or homes repossessed through foreclosure, but only 30% have actually made it onto the market. RealtyTrac is an online real estate channel where potential homebuyers look for properties discounted after the foreclosure process, along with more traditional sales. It also puts out monthly foreclosure numbers across the country by tracking filings from notices of default through repossession at the county level. According to its year-end report, foreclosure filings reached a new high in 2010 and should climb even higher this year, possibly surpassing 4 million filings. And that’s not counting the more than 5 million delinquent loans that have yet to enter the initial stages of the foreclosure process, Sharga said. “I think you’re looking at a 2011 that will be worse than 2010, then some stabilization through 2012. In 2013, you’ll see a more manageable number of REO,” Sharga told HousingWire Saturday at the REO CON default industry education summit in Fort Worth, Texas. The major kink in the housing market’s recovery, and for the macro economy overall, is the work left to be done on homes currently in the foreclosure process, those about to enter it and the amount of repossessed homes the banks must shed. Striking a proper balance on how to mange this shadow inventory of foreclosures is vital for the banks to show a healthy balance sheet while not dumping too many distressed properties onto the market, further dragging down home prices and values. A recent study from Morgan Stanley (MS) showed the shadow inventory, those properties facing imminent default, evolving from mostly subprime and Alt-A loans to containing more prime loans as elevated unemployment levels have pushed more homeowners behind on their mortgage. Analysts said that some 8 million repossessions would need to be liquidated over the next five years before the market stabilizes. Adding to the problem are recent issues the banks are having processing the paperwork. In October, the banks had to hold up foreclosures to refile affidavits signed improperly in many states, pushing more than 250,000 foreclosure cases into 2011. Reports recently showed that the problem may have spread to the notices of default as well. As RealtyTrac employees have found, notices of default “dropped off a cliff” late last year and are still off in January, Sharga said. And in the 23 states where lenders must foreclose on a homeowner through the court system, backlogs of cases have formed month-long delays. Sharga said a court clerk in Florida, one of the states with the longest traffic jams, told him between 500,000 and 600,000 cases are yet to be heard. Sharga said he’s encouraged by the uptick in demand for REO. “We’ve seen more traffic on our site, and even more buyers raising their hand asking for help from a Realtor,” he said. “This means they’re getting serious about buying again.” He also said that the most traffic comes from Southwestern states and Florida. But Sharga said there is plenty of work to be done, and that any further delays in the process will only set back an already postponed recovery. “It won’t feel normal again until about 2013,” Sharga said. Write to Jon Prior. Follow him on Twitter: @JonAPrior