Morningstar: More Time Required to Clear Distressed Pipeline


Analysts find fewer short sales and more loan modifications have contributed to a steady decline in distressed inventory nationwide as the liquidation rate has slowed down even further.

At the current pace of liquidation, Morningstar Credit Ratings said it will take 41 months to clear the national distressed inventory pipeline, up from 40 in the first quarter of 2013 and 38 months a year ago.

The 2Q 2013 Morningstar RMBS Distressed Inventory Index shows the overall distressed inventory has decreased by 21% from a year ago, while the number of liquidations declined a significant 37%.

Distressed inventory data include first-lien mortgages that either are 90 days or more delinquent, in foreclosure or real estate owned, as well as 50% of the first-lien mortgages that were cured from a serious delinquency in the past 12 months thus are more likely to redefault.

Modifications have picked up significantly over the past three months, as roughly $99 billion of the distressed inventory had been modified as of May 2013 compared to $94 billion in February 2013. Analysts expect the increase may ultimately reduce the foreclosure starts, the FCL-to-REO roll rate, and non-REO third-party sales, while REO sales continue to be on the decline mode.

As of the end of May 2013 approximately 949,000 units were distressed, down 6.5% from three months prior, due to continued liquidation albeit very slowly and fewer properties entering the distressed inventory as a result of improved loan performance a lower new delinquency rate since the first quarter of 2013.

Meanwhile, approximately 43% of the national distressed inventory is stalled in foreclosure status. Because judicial foreclosure processes typically take longer than nonjudicial foreclosure processes, not surprisingly the top six states for distressed inventory are judicial states.

Analysts found from conversations with local Realtors from previously hard-hit regions that certain markets, such as Phoenix, have seen bidding wars driven by demand from institutional investors looking for available properties that has lowered the distressed inventory and is driving up home prices.

For example, institutional cash buyers drove up the demand and made a notable impact on distressed inventory and property prices in hot markets, such as Phoenix, Atlanta and Las Vegas.

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