S&P Predicts Four Years to Clear Distressed Properties

February 4, 2011 (Jeff Alan)
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Standard and Poor’s Rating Service (S&P) has released its “Fourth-Quarter Shadow Inventory Update” and predicts that it will take more than four years to clear the shadow inventory of distressed properties. The prediction is an 11 percent increase from the third quarter of 2010 and a 40 percent increase from the fourth quarter of 2009.

Topping the list is New York where the S&P predicts that it will take up to 10 years to fully clear the city’s shadow inventory, twice as long as any of the other top 20 metro areas.

Shadow inventory is defined as distressed properties in which borrowers are 90 days or more delinquent on mortgage payments and where properties have recently fallen into foreclosure or are real estate owned.

Miami is the only top-20 metropolitan statistical area (MSA) for which our estimate of the time to clear the inventory of distressed properties remained stable since the fourth quarter of 2009.

The report blames the increasing inventory to liquidation rates that are falling in part because of increasing timelines for resolving troubled assets. The 90-plus-day delinquent loans and foreclosed properties are taking longer to become REO, which is lengthening the overall timelines for resolving troubled assets.

Los Angeles has the largest shadow inventory overhang balance but it is expected to clear its inventory in 50 months or in about 4 years.

“Our recent estimates of months to clear have increased primarily because of the deceleration of the distressed property liquidation rate rather than a rise in overall distressed property levels,” according to the S&P report. “It seems that 90-plus-day delinquent loans and foreclosed properties are taking longer to become REO, which is lengthening the overall timelines for resolving troubled assets.”

There was still some good news coming out of the report; the number of overall distressed loans continues to fall and loan cure success rates have been improving since the second half of 2008. Also, the recidivism rates for loans cured or modified in fourth-quarter 2009 were significantly lower than for previous periods.

Here’s a rundown of the metro areas in the report:

MSA Number of months of inventory

4Q10

3Q10 2Q10 1Q10

4Q09

Atlanta 49 44 41 40 35
Boston 71 62 60 59 54
Charlotte 65 52 47 48 44
Chicago 59 52 48 45 42
Cleveland 57 47 43 40 36
Dallas 56 46 41 43 41
Denver 38 35 33 32 28
Detroit 31 30 27 25 22
Las Vegas 33 30 28 24 20
Los Angeles 50 45 43 41 36
Miami 60 60 64 64 60
Minneapolis 38 35 32 27 21
New York 130 119 115 107 100
Phoenix 25 23 21 20 17
Portland 51 45 38 34 31
San Diego 39 35 32 31 27
San Francisco 42 38 34 32 28
Seattle 59 54 48 45 42
Tampa 57 55 55 55 51
Washington 50 44 40 37 33

Tags: S&P, shadow inventory, loan cure success rate, distressed properties, borrowers, mortgage payments, foreclosure, liquidation rates, troubled assets, delinquent loans