Shadow inventory sees 1.2 million decline in 2012

By Sari R. Updated on 9/25/2012

In the first half of 2012, several banks cut 1.2 million foreclosed homes out of the shadow inventory that is currently looming over the housing market.  This rate is projected to double by the end of 2012.  Even with this potential increase, however, 4 million foreclosed properties will still remain.

There were around 335,000 short sales closed in the first half of 2012, nearing the 420,000 modifications that were done.  About 470,000 in REO were also sold.  In March, the $25 billion foreclosure settlement involving five of the biggest mortgage servicers led to an increase in short sales over modifications.

Analysts at Chase are forecasting that the AG settlement could lead to over 100,000 principal reduction modifications with a $100,000 reduction per borrower.  Servicers will have to strongly push for this in the latter half of 2012 in order to reach this goal.  Only 7,000 have been completed so far in 2012, but banks said they have become diligent about increasing offers over the last few months. 

Servicers are expected to sell around 950,000 foreclosed homes and 670,000 short sale properties by the end of 2012; around 800,000 modifications are expected before the end of 2012.  Estimates about the shadow inventory differ depending on how delinquent loans must be before being added to the inventory.  Analysts claim that the inventory includes loans that have gone 60 days or more without payment.  Overall, the consensus remains that the banks will continue to make progress, and house prices will continue to improve.

The result of all this is that it will solve a major downfall of housing:  the amount and magnitude of borrowers who have to make payments on loans they owe more than their house’s worth.  Analysts estimate that when prices increase by 10%, the 10.8 million borrowers currently underwater could drop to as low as 9 million borrowers.