REO’s and Shadow Inventory are Roadblock to Recovery of Housing Market

Dennis Norman St LouisA report issued yesterday by Equifax reveals just how severe the impact of shadow inventory (homes that have been, or should be, foreclosed on but have not been put back on the market for sale yet) and REO’s (properties owned by lenders after acquiring through foreclosure) are on a housing market recovery.

According to Equifax, REO rates remain high and, in fact, REO rates since March 2011 are on the rise and in May 2011, 3 percent of the amount of all U.S. first mortgages were REO properties.

The report shows that lenders wrote off $304.6 billion in “home-finance” related loans in 2010, compared to a combined total of $126.7 billion for 2006 and 2007. Upon analyzing data for May 2011, it is revealed that there are about $319.7 billion in first mortgage loans originated in 206 and 2007 that are in the initial foreclosure process which will result in many of these loans being written off and, hence, the reason for Equifax’s concern about the impact on the market.

Other highlights from the report:

  • Almost two-thirds of past-due balances are from loans originated from 2005 to 2007, with home equity revolving potential foreclosures totaling $11.9 billion in May 2011.
  • Even though first mortgage 30+ delinquency rates hit a pivot point in March 2010, roll rates continue to rise on 60 to 90+ balances – suggesting minimal improvement in first mortgage payment performance.
  • While home equity line originations in March 2011 increased for the first time in four years, the average credit limit on a home equity line dropped 15.07 percent over the same time period.
  • Home equity line of credit given to prime borrowers totaled $6.4 billion in March 2011 – more than 98 percent of the $6.5 billion in new home equity loans awarded during this time period. Sub-prime loans accounted for only $100 million of this total – reflecting the impact of tighter underwriting strategies.

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