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Fitch Says 7M Homes in the Shadows Will Take 40 Months to Clear

New figures released by ""Fitch Ratings"":http://www.fitchratings.com put the industry's shadow inventory at 7 million homes. The agency defines the shadow supply of properties as loans that are[IMAGE]delinquent, in foreclosure, or real-estate-owned (REO) by the servicer, and Fitch says based on recent liquidation trends, it will take more than 40 months to clear this existing distressed inventory.

According to the ratings agency, the number of months between the date of the borrower's last payment and the date of liquidation has steadily increased over the past several years, and is now at more than 18 months on average. Fitch says that is the highest figure on record.

While the volume of newly delinquent mortgages has begun to improve in recent quarters, Fitch says liquidation rates of existing distressed properties have been constrained by weak demand and expanded initiatives to modify loans for troubled borrowers.

On top of that, the agency's analysts believe the recent discovery of defects in the residential mortgage foreclosure process will further extend liquidation timelines, slowing the resolution of distressed properties in the shadow inventory and preventing home prices from finding a floor.

""While the reduced volume of distressed sales since 2009 has temporarily helped home prices, Fitch believes that the extension in foreclosure and liquidation timelines is simply prolonging the housing correction underway,"" the agency said in a report issued Monday.

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The total number of troubled loans reached a peak in early 2010 and had begun to show some improvement prior to the most recent foreclosure moratoriums resulting from documentation issues, Fitch said.

According to the ratings agency's analysis, the latest industry trends indicate that it will take more than three years to sell the properties of loans that are currently seriously delinquent, in foreclosure, or REO. Fitch says for judicial foreclosure states, such as Florida, it is expected to take longer than the national average of 40 months to resolve the distressed loans, while for nonjudicial foreclosure states, like California, the inventory will likely be resolved faster.

The agency points out in its report that the market's ability to absorb the supply of distressed homes has been affected by limited demand for home purchases.

While interest rates are near historical lows and affordability has improved, fewer potential buyers can qualify for new loans due to the heightened credit standards, Fitch says. Additionally, high unemployment, weak consumer confidence, and uncertainty about the future of home prices have prevented some potential buyers from entering the market.

""Recent concerns about the title-transfer process for foreclosed homes could further weigh on demand,"" Fitch noted.

The agency says at this point, it is still unclear how much the foreclosure process will be extended specifically due to document defects. However, even prior to recent developments, Fitch assumed the ultimate resolution of the backlog of distressed properties would result in further home price declines and prevent sustained home price increases for a number of years.

""Fitch is currently assuming approximately a further 10 percent home price decline nationally, with the majority of the adjustment occurring by the end of 2012. However, the timing of the adjustment will be affected by the timing of the distressed inventory resolution,"" the agency said in its report.