Shadow inventory shrinks as banks employ loan modification efforts

America’s shadow inventory — mortgages that are either delinquent or in foreclosure but haven’t hit the market yet — continues to fall, according to an S&P report.

The report says that one potential reason for the decline is that fewer loans are resulting in foreclosures since banks are trying to modify them so that homeowners can stay.

“As the crisis started hitting, the servicers starting pushing everything to foreclosure, and then they said, ‘Wait a minute, let’s not throw everyone out of their homes.’ So the level of modifications rose,” said Diane Westerback, a managing director in S&P’s structured finance unit. “The servicers want their mods to be successful. They want them to work.”

However, of all the modifications done a year ago, nearly 40% are back into default.

S&P does not include loans from government-sponsored agencies in its definition of “shadow inventory.”