From HW:

Whether they like it or not, the nation’s banks control most of the country’s shadow inventory, according to a report Friday from Morgan Stanley.

Even more, properties in imminent default are typically cheaper homes with prime mortgages. The analyst adds that their findings buck conventional wisdom that these homes are either concentrated in the slums of Detroit, or prevalent amongst cardboard cutter McMansion neighborhoods.

The shadow inventory, they say, is the biggest problem for average Americans living in the nation’s major cities.

And, what’s more, the homes are more and more being controlled by the banks, as opposed to Fannie Mae, Freddie Mac or private securitization trusts.

“While agencies certainly maintain control over a large portion of the shadow inventory at just over a third, we can see that the majority of the control over delinquencies is in the hands of the banks, and their share has increased over the past year,” reported Oliver Chang, James Egan and Vishwanath Tirupattur (see chart below):

“This may be because borrowers are becoming delinquent at a faster rate for bank-held loans, but checking transition rates for each controlling party, we do not see a significantly larger change in transitions into delinquency for bank-held loans,” they added.

Of the shadow inventory, 75% are valued below $250,000, showing that McMansions have a small share of delinquencies (see below chart):

Further, the shadow inventory is growing across all of the United States. The analyst expect that more than 8 million liquidations are in order over the next five years before housing stabilizes.

“While hard-hit cities represent a more than fair share of shadow inventory, its distribution broadly encompasses all corners of the country,” said the analysts.

The liquidation of subprime early on in the recession is now being replaced by later delinquencies in prime collateral. The shift in collateral is making the supply imbalance worse for the best part of the credit spectrum.

CoreLogic said in September that based on the shear number of prime mortgages in the market, that foreclosure and delinquency rates would steadily tick upward. Compared to the less than 3.5 million subprime, there are about 40 million prime loans in the marketplace, 6.2% of which were 60 days delinquent in June 2010 and 3% of which were 90 days delinquent.

“We do see a slowdown in liquidation rates of bankheld loans, suggesting that the increasing share of shadow inventory is due to banks holding onto their delinquent loans longer than agencies or private securitization trusts,” they said.

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