For the sake of this discussion, shadow inventory are those homes that are more than 12 months delinquent in the mortgage payment or in foreclosure. Recent report by Anherst Securities Group, we have currently a total shadow inventory of 3.2 million units. Meanwhile we are liquidating 100,000 loans/month which translates into 32 months (2.7 years) to liquidate those loans. And this time frame does not take into account for those loans that have yet to reach 12 months delinquency and those homeowners who are still paying mortgages on underwater properties.
The problem of liquidation is exacerbated by the tightening of credit standards for new loans by requiring higher FICO scores, even lower LTVs (Loan to Value). For example, GSE and Bank portfolio loans for 2009/2010 had an average of 67 % LTV and the average FICO score for new GSE origination was 762 and 756 for banks for those years. These numbers are only met by a very select group of consumers and the new proposed Dodd Frank rules implementing QRM (Qualified Residential Mortgage) and QM (Qualified Mortgage) will furtehr tighten the credit availability.
So far the effort to correct the supply/demand imbalances has been attempted thur modification plans which have had a very low success rates. These actions have not solved the problem, they merely postponed them.
Right now home prices are more affordable when we compared with the peak prices of 2,006. Close to 40 % in price correction has been attained (more in some areas) and mortgage rates are at generational low, comapred to 11% in 1990, now hovering little over 4 %. But some experts still foresee more price drop and further homeowners being underwater creating a housing death spiral.
What are the solutions to this supply/demand imbalance ? There is no magic bullet that will solve the current situation but some recommendations will be for the banks to raise their approval rates for loan mod including principal reduction and help borrowers to cope with payment shock in the early stages of delinquency. I have clients who are out of job and can't afford the reset rate which in many cases doubled making impossible to keep making payments. Even those homeowners qualifying for the loan mod, many end up being denied further assistance as borrowers are given conflicting information. Banks need to seriusly consider not just shaving interest rates but offer borrowers substantial debt relief and this will require bold actions.