S&P: Shadow inventory to grow

Lenders are likely to add at least 1.75 million homes to their real estate owned (REO) property rolls that will take nearly three years to sell and put pressure on home prices, according to a new report from Standard & Poor's Financial Services LLC.

Loan servicers appear to have "exhausted the supply of plausible candidates for loan modifications and switched their emphasis" back to foreclosure, the report said.

The high redefault rate on loan modifications will also add to the "shadow inventory" problem, analysts at Standard & Poor's said.

To assess the potential magnitude of the shadow inventory problem -- homes that are either owned by lenders or destined to end up in their hands but that have not yet been put up for sale -- Standard & Poor's looked at four categories of loans: performing; recently "cured"; seriously delinquent; and REO.

In early 2009, loan servicers had switched their strategy from rapid foreclosure to loan modifications, the report said. The percentage of loans moving from seriously delinquent to REO fell from 58 percent in June 2008 to 28 percent in the spring of 2009, the report said.

The trend has since reversed, with the balance of distressed loans directly paid off (as the result of a short sale, for example) or foreclosed on by lenders rising from 44 percent in April 2009 to 64 percent in October 2009, the report said.

The Obama administration last fall announced guidelines for a program that provides incentives for loan servicers and homeowners to engage in short sales when borrowers who are eligible for the Home Affordable Modification Program (HAMP) don't qualify for a loan mod (see story).

"Servicers are requesting, and borrowers are accepting, short sales in increasing numbers," analysts at Standard & Poor's said. ...CONTINUED

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