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'Shadow' housing inventory seen topping 2 million

NEW YORK (Reuters) - The shadow supply of homes set to hit the U.S. housing market jumped more than 10 percent from a year earlier to 2.1 million units in August, suggesting prices will continue to decline, a mortgage data firm estimated on Monday.

A vacant home for sale is pictured in Yonkers, New York, October 26, 2010. REUTERS/Mike Segar

Based on the number, it would take eight months to work through the shadow inventory, compared with five months a year ago, the firm, CoreLogic, said. Shadow inventory includes properties whose borrowers are at least 90 days delinquent or those in foreclosure or already foreclosed and not yet listed for sale.

Together with the 4.2 million homes on the market, it would take 23 months to work through supply at the current pace of sales, up from 17 months a year ago, the firm said.

Shadow inventory is seen as one of the chief threats to the fragile housing market that is showing new signs of weakening. If banks swiftly dump the homes on the market, economists fear it may renew a vicious cycle that could depress home prices to levels that would cause more defaults and foreclosures.

Adding to the problems are errors in processing tens of thousands of foreclosure cases at Bank of America Corp, the largest U.S. mortgage servicer, and other financial institutions.

The massive failure to provide proper documentation in court has resulted in delays to an already lengthy processes of repossessing homes, leading to a backlog in paperwork and repossessions as the companies fix their procedures. The banks are also facing a nationwide probe by state attorneys general.

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market,” Mark Fleming, CoreLogic’s chief economist, said in a statement.

“This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing,” he said.

What’s more, buyers of distressed properties have become gun shy due to the foreclosure processing problems, according to a Campbell/Inside Mortgage Finance survey of real estate agents.

The poll found 14 percent of owner-occupant homebuyers and 6 percent of investors refused to view foreclosed properties in October. Distressed properties accounted for 44.3 percent of transactions, down from 47.5 percent in September, it said.

Editing by Jeffrey Benkoe

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