The non-agency shadow inventory will take more than 40 months to clear, according to projections from Fitch Ratings. The ratings firm pegs the shadow inventory for non-agency residential mortgage-backed security (RMBS) loans at 1.5 million. For all loans, the total is closer to 7 million.
Fitch – which defines shadow inventory as the total number of delinquent loans, foreclosures and bank-owned properties – notes that fallout from foreclosure affidavit defects will elongate liquidation timelines and cause further buildup.
‘Due to the heightened scrutiny surrounding the documentation in judicial-foreclosure states, it is expected that the rate of completed foreclosures will further slow notably in those areas,’ Fitch analysts Grant Bailey, Diane Pendley and Rui Pereira write in an RMBS report. ‘However, the timelines for both judicial and nonjudicial foreclosures could be affected as servicers and regulators reassess procedures.’
Timeline extensions will increase loss severities for U.S. RMBS and prolong the housing correction, Fitch says. Non-agency RMBS loan liquidation timelines are already at historical highs. On average, a loan takes 18 months to pass through from final borrower payment to liquidation, according to Fitch's data.
Tougher lending standards, weak consumer confidence and concerns about title transfers for foreclosures are all weighing on servicers' ability to liquidate properties.
Servicers have increased loss mitigation and collections staffing significantly over the past two years, with new personnel focusing on loan modifications, Fitch notes, further calling the effectiveness of mods in reducing the number of liquidations ‘disappointing.’