Fitch Foreclosure Forecast Casts a Pall on Recovery Hopes

Not until March 1, 2014 will the last of the seven million properties that are currently delinquent, in foreclosure, or bank-owned finally return to life as homes or investments.

To put things in perspective, the XXII Olympic Winter Games in Sochi, Russia will have just ended, the next Presidential Administration will in office, Avatar 2 will be in release, the NFL’s top teams will be getting ready to play the Super Bowl at the Meadowlands, and freshmen in college today will be getting ready to graduate.

Forty months until today’s glut of distressed properties, known as the “shadow inventory,” are finally past us. That’s the latest prediction from Fitch Ratings, the expert source on the mortgage backed securities market.

As a result of the extended large inventories, prices will fall again, probably by ten percent late by next year depending on how long the current ForeclosureGate moratoria imposed by several large lenders lasts.

Though the rate of delinquencies has improved in 2010, Fitch says the liquidation rates of existing distressed properties have been held back by weak demand and expanded initiatives to modify loans for troubled borrowers. As a result, liquidation timelines continue to increase and are at historical highs. The recent discovery of defects in the residential mortgage foreclosure process. known as “ForeclosureGate,” will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.

“Considering recent monthly liquidation trends, it would take more than 40 months to clear the existing distressed inventory in the non-agency sector,” the agency said in a report yesterday. Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway.

The high shadow inventory and growing foreclosure and liquidation timelines are also expected to hurt U.S. residential mortgage backed securities’ performance. Longer timelines in arrears and foreclosure result in higher servicing advance expenses and other carrying costs that generally result in a higher loss severity.

For judicial foreclosure states, like Florida, it is expected to take longer than the national average to resolve the distressed loans, while for nonjudicial foreclosure states, like Nevada, it will be resolved faster.

New figures released by Fitch yesterday put the industry’s shadow inventory at 7 million homes. The agency defines the shadow supply of properties as loans that are delinquent, in foreclosure, or real-estate-owned (REO) by the servicer, and Fitch says based on recent liquidation trends, it will take more than 40 months to clear this existing distressed inventory.

The number of months between the date of the borrower’s last payment and the date of liquidation has steadily increased over the past several years. For loans liquidated in the most recent month, more than 18 months had passed since the borrower’s last payment on average. That is the highest figure on record, Fitch said.

While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says. Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.