In the second quarter of 2011, Standard & Poor’s Rating Services’ estimate of the months to clear the supply of distressed homes on the market in the U.S. fell for the first time since mid-2009. The current estimate is 47 months, a five-month decline from our first-quarter estimate and the largest quarter-to-quarter drop since mid-2008. While the volume of these distressed U.S. nonagency residential mortgages remained extremely high at $405 billion in the second quarter, it has declined every quarter since mid-2010 including the most recent. In conjunction with stable liquidation rates, we believe these are positive signs that the amount of time it will take to clear this “shadow inventory” should continue to decline over the next year.

In tandem with our improved months-to-clear estimate, each of the individual top-20 metropolitan statistical areas (MSAs) that we track reported lower months-to-clear estimates this quarter than the previous quarter. In our view, this is a yet another sign that the months-to-clear has leveled off.

At the end of the second quarter of 2011, Standard & Poor’s estimated that the balance of shadow inventory had shrunk to approximately $405 billion, from an estimated $433 billion at the end of the past quarter. This latest number represents just under one-third of the outstanding nonagency residential mortgage-backed securities (RMBS) market in the U.S.

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