As of January 2011, the "shadow inventory" of homes declined slightly from the same time period a year ago, but nine months' worth of supply still remains, according to a new report released by CoreLogic.

There are currently 1.8 million shadow inventory units nationwide, down from two million units in January 2010. (Both figures represent a nine months' supply of properties.)

Shadow inventory, also known as pending supply, is calculated by determining the number of distressed properties not listed on multiple listing services where the mortgage is 90 days or more late, in foreclosure already, or REO on the books of a financial institution.  

Of the 1.8 million units of shadow inventory, 870,000 are seriously delinquent (4.2 months' supply), 445,000 are in some stage of foreclosure (2.1 months' supply) and 470,000 are already in REO (2.2 months' supply).

The highest levels of distressed months' supply, which is the ratio of the number of properties that are 90 days or more delinquent to the number of home sales, are in New Jersey, Illinois and Maryland.

CoreLogic said the main reasons why these states have the highest distressed supply is due to a combination of higher than average 90 plus day delinquencies and lower sales activity.

The states with the lowest distressed months' supply are North Dakota, Alaska and Wyoming. According to CoreLogic, this is where the boom/bust did not occur.

In addition to the current shadow inventory supply, CoreLogic revealed that there are currently approximately two million negative equity loans that are more than 50% "upside down" that will likely become shadow supply in the near future.

CoreLogic research found that loan modifications and short sales could potentially reduce shadow supply by half, but low borrower response rates to lender outreach and high modification redefault rates would provide only a small share of remediation to the shadow supply.

"While the trend of the shadow inventory is improving somewhat, the current level and distressed months' supply remain very high," said Mark Flemming, chief economist for CoreLogic. "The short-term weakness in prices and longer-term weakness in the drivers that affect the housing market imply that excess supply will remain high for an extended period of time."

Meanwhile, in related news and as reported by ASR sister publication American Banker Pipeline, the shadow inventory is actually much worse by another measure: the enormous backlog of foreclosures that have not yet been processed, according to Lender Processing Services (LPS).

Because many of the largest servicers halted foreclosures last year, the inventory of loans in foreclosure keeps building; most of those homes will ultimately have to be put on the market. That will put more downward pressure on home values, LPS said Tuesday.

Roughly 30% of all borrowers in foreclosure have not made a payment in more than two years, LPS found. At the end of February, borrowers were delinquent an average of 537 days before being foreclosed on, compared with 417 days a year earlier, LPS found.

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