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It will take less time than previously expected for the housing market to clear the supply of distressed homes on the market, but that so-called shadow inventory will still be around for nearly four years, Standard & Poor's Rating Services said this week.
August 23 -
Home prices will fall 5% this year and hit bottom in 2012, assuming sales of foreclosed homes start to pick up this year, according to JPMorgan Chase analysts.
August 16
Three years after the financial crisis, the growing backlog of delinquent mortgages is proving hard to kill.
Delinquencies on credit cards and auto loans have largely fallen back to levels seen before the recession, but debt-strapped consumers are still struggling with "zombie mortgages," says Dean Maki, managing director and chief economist at Barclays Capital.
Zombie mortgages are home loans that are worth more than the underlying collateral of the house, Maki says. The backlog of zombie mortgages is impeding a recovery in home sales, because many sellers are stuck with loans they cannot repay even if they sell their home. Meanwhile, that backlog is encouraging buyers to delay purchases of new homes in the hopes that housing prices will drop even further.
"What we have is an overhang of zombie mortgages," Maki said in an interview Wednesday. "It's a housing market problem rather than an overall household indebtedness problem. Unlike the zombies that stagger around in the movies, these contracts will not remain forever undead."
About 20 million borrowers are trapped in these zombie or "underwater" mortgages, in which they owe more than their home is worth. When those loans become delinquent, they are often referred to as limbo loans, because the government has urged mortgage servicers to hold off on foreclosures.
But the longer a borrower fails to make mortgage payments, the higher the likelihood that the loan will eventually go into foreclosure. And it will take years for many of them to go through the foreclosure process or for the loans to be restructured through modifications, further prolonging the glut of properties on the market and depressing housing prices.
Banks and mortgage servicers are trying to avoid exacerbating the situation by not putting all of their real-estate owned properties on the market at once.
"There's a lot of inventory but it will come through methodically over three to four years, which will prohibit any price appreciation," says Evan Gentry, the CEO of G8 Capital LLC, a Ladera Ranch, Calif., buyer of distressed properties.
More than 2.1 million homes are in the process of foreclosure and another 1.8 million homeowners were 90 days or more past due on their mortgage at the end of August, according to Lender Processing Services Inc.
Maki says that any policy initiatives that delay or threaten the resolution of "zombie mortgages" should be viewed as bad news, since such policies could ultimately delay a broad economic recovery.
He argues that investors should pay more attention to the foreclosure process and any local upturn in residential construction than to overall household debt levels.
If homebuilders continue to hold off on construction, an eventual rebound "could be quite strong," Maki says. "We see the potential for a stronger cyclical recovery once the 'zombie mortgages' and the associated foreclosure pipeline are relegated to the history books."
