"Shadow inventory," millions of distresses homes that could suddenly be put up for sale, and depress home prices even further is an ominous cloud hanging over the struggling housing market. Standard & Poor estimates that there is between 4 and 5 million homes in shadow inventory that can potentially be added to the glut of unsold homes already on the market.
Following the robo-signing scandal, many homeowners who are delinquent on their mortgage payments have been able to stay in their homes, sometimes for years. Homes that should be going through foreclosure aren�t because banks have been slow to initiate the proceedings and process the paperwork. The first filings issued to delinquent borrowers may come many months after they stop making their regular mortgage payments.
According to Diane Westerback, Managing Director of Global Surveillance Analytics for S&P, when all of the shadow inventory finally makes it to market, it will likely do so at a deep discount, weighing on overall home prices and depressing values further.
On a positive note, the time it would take lenders to purge all of this "shadow inventory" through foreclosure sales, mortgage modifications and other measures shrunk to 47 months during the second quarter, a significant drop from the 52 months it estimated for the first quarter of this year.
Homes fall out of "shadow inventory" when banks repossess and resell the homes, when their owners sell them, or when the loan is "cured", meaning the borrowers catch up on their mortgage payments and remain up-to-date. S&P counts 70% of all cured loans as part of the shadow inventory, since borrowers with cured loans often re-default.