A new report from one of the three major ratings agencies warns that the “the mortgage crisis may be far from over.” The culprit: shadow inventories. One piece of good news, however, is that re-defaults on modified loans have recently eased.
The report, released today by Standard & Poor’s Ratings Services, indicated that the seasonally adjusted S&P/Case-Shiller Home Price Index has risen 3 percent since May 2009. But the improvement was dismissed as temporary — with the New York-based firm attributing the strength to a temporary constriction in the foreclosure inventory as servicers and courts struggle to clean out a backlog and political pressure continues.
S&P predicted lower home prices and “more delinquencies” as a result of the current shadow inventory — which includes all delinquent loans and real-estate owned. An estimated $473 billion in loans on around 1.75 million properties will need to be liquidated — an amount equal to half of existing homes on the market.
“In Standard & Poor’s Ratings Services’ view, the mortgage crisis may be far from over,” the report said. “The overhang of homes heading toward liquidation suggests more delinquencies and lower home prices are to come.”
The current shadow inventory will probably take around 33 months to clear at today’s pace of liquidations, S&P said. In addition, some loans that have not yet shown distress signs will also default as a result of a weak economy, struggling home values and a contraction in the supply of mortgage finance — adding to the existing shadow inventory.
The findings were based on securitized loan-level data from LoanPerformance.
“There is a rapidly growing shadow inventory of properties where borrowers are delinquent but foreclosure has not been completed,” S&P said.
The report also indicated that most of the recently cured loans — such as those that were modified — are unsustainable in the long run. But despite a high re-default rate, S&P did note that re-defaults have fallen from around 75 percent in the first-half 2009 to under 70 percent more recently.
