Clearing out the backlog of distressed housing inventory will likely take more than three years, dragging down housing prices and delaying the overall recovery of the housing market, according to a new analysis from Fitch Ratings.

With an estimated 7 million U.S. homes either in foreclosure, already repossessed or with seriously delinquent mortgages, Fitch estimates that it will take 40 months to clear out the so-called "shadow inventory" of distressed homes at current liquidation rates.

However, that could get dragged out even longer owing to the ongoing "robo-signing" scandal and state attorneys general investigation into foreclosure documentation practices of major mortgage servicers, according to the Fitch analysis.

Although fewer homes have been falling into arrears in recent quarters, Fitch says that low demand and expanded loan modification initiatives have constrained liquidation rates for distressed properties, complicating efforts to clear out the backlog.

Expanded loan modification efforts have contributing to declining rates of distressed home sales since last year, leading to a modest rise in home prices, according to the report. However, the company expects this effect will be temporary, and predicts that home prices will decline another 10 percent nationally, with most of the decline occurring by the end of 2012.

The company does not expect that loan modification efforts will be successful in significantly averting additional foreclosures, noting that approximately half of all loan modifications to date have redefaulted within one year. However, it notes that more recent loan modifications are showing higher rates of success.

Published on November 2, 2010