Longer liquidation timelines for bank-owned properties (REO) resulted in wider loss severities on residential mortgage-backed securities (RMBS) during the fourth quarter, Fitch Ratings says.
Loss severities increased to 61.7% in the fourth quarter, up from 59.9% in the third quarter but down from 62.4% from a year ago, according to the latest Fitch quarterly index. The increase in loss severity follows six straight quarters of declines.
The report finds that rising home prices and a strengthening job market have led to improvements in delinquencies and foreclosures. The 60-day delinquency rate declined to 25.6% in the fourth quarter, down from 26.1% in the third quarter and down from 28.7% a year ago, the report states. The delinquency roll rate rose slightly to 2.4% in the fourth quarter, up from 2.3% in the third quarter but down from 2.6% a year ago.
However, longer foreclosure timelines – particularly in the judicial states – are offsetting the recovery. The problem is that home price appreciation has flattened in recent months, while foreclosure timelines have continued to lengthen.
Adding to the challenge is that longer foreclosure timelines typically result in the properties deteriorating more – thus diminishing their market value. For months now, lenders, servicers and investors have expressed concern that the ‘bottom of the barrel’ REO is proving harder to liquidate, due to the poor condition of the properties. The lengthening foreclosure timelines will likely result in further deterioration of the assets, as homeowners – especially those who are underwater on their mortgages – are not inclined to invest in property maintenance and basic upkeep while they are going through the foreclosure process.
The Consumer Financial Protection Bureau's new mortgage rules could exacerbate the problem, depending on how many consumers file defensive claims under the bureau's new ability-to-repay/qualified mortgage rule. This, in turn, could result in timelines for the properties increasing by as much as six months, according to an analysis from Standard & Poor's. Currently, foreclosure timelines in some judicial states can run as long as four years. This additional lengthening of the timelines will come regardless of whether or not a borrower succeeds in litigating their claim.
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