Fitch Says Shadow Housing Inventory At 7.5 Million--Will Take 40 months To Clear

Fitch just released a report which shows the housing market will not be recovering anytime soon. The report noted that as of September 2010, shadow housing inventory stood at a shocking 7.5 million properties. Another problem for the market to digest is the increasingly prolonged foreclosure and liquidation timeline. Fitch estimates that it currently takes 18 months from the time a homeowner stops making payments to the time banks actually sell the property, which is an all-time record. The main reason for the increase in the timeline is the government's politically motivated HAMP program, which foolishly tries to keep people who cannot afford their mortgage in their home. While this may be a good move for ambitious politicians, it only prolongs the process of default and foreclosure. According to recent numbers, the default rate for 2009 HAMP modifications is over 50%. A more startling statistic is that default rates for 2010 loan modifications is over 20%. About the only good thing about the HAMP program is that it is slowly winding down as there are not too many more homeowners eligible for the program.

Since the majority of loan modifications were down in 2009, it gave the artificial impression that the level of distressed inventory was decreasing and helped to boost home prices. But we now find out that this was not true, instead the drop was due to a large number of failed loan modifications. However, we are now seeing the banks foreclose on HAMP participants who could not afford their loan modification. This comes at a time when home sales have fallen off a cliff thanks to the expiration of the government's home buyer tax credit. Fitch is particularly concerned about this dynamic because it notes the market is simply not strong enough to support a flood of new REO (real estate owned by the banks) properties.

This report concludes that the large number of future distressed properties will lead to a further decline in home prices of 10%. Fitch does not expect housing to recover until late 2012 and the recovery will be very slow with modest prices increases (3%) in the future. Based on these assumptions, Fitch believes loss severity could increase by up to 5% for RMBS. Currently, loss severities on liquidated loans stand at 75% for sub-prime loans, 55% for Alt-A, and about 40% for prime. Personally, I think Fitch is a little too optimistic and believe that home prices could easily fall a lot further. Especially in the bubble areas of California, Florida, and Nevada where you could see prices fall 20% or more. Prices have to fall to get back in line with widely used measures of home affordability like price-to-income, home price-to rent, etc. This is a process the Federal Reserve will fight at all costs as it desperately tries to prop up nominal home prices.

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HAMP---50% Failure Rate For Trial Loan Modifications

Fitch Says Shadow Housing Inventory At 7.5 Million--Will Take 40 months To Clear