Rising Servicing Costs To Boost Loss Severities

7362_cash2 Rising Servicing Costs To Boost Loss Severities As servicing costs increase and home values weaken, loss severities on distressed mortgages are likely to increase another 5% to 10% from current levels, Fitch Ratings says.

The average loss severities on prime loans are anticipated to rise to between 49% and 54%, and Alt-A loss severities could rise to as high as 69%. Average loss severities on subprime loans are currently 75%; Fitch anticipates they could go as high as 85%.

Prior to the recent negative trends, loss severities had remained stable for over a year, Fitch explains. Home-price improvements that emerged in the second quarter of 2009 helped support recovery values. Home prices rose nearly 6% nationally, according to the Case-Shiller Index.

However, the positive momentum in home prices is not sustainable, according to Fitch Managing Director Grant Bailey.

‘With the [home buyer] tax credits expired and a high inventory of distressed properties remaining to be sold, the housing market faces significant challenges in 2011,’ Bailey says. ‘The higher the glut of unsold properties on the market, the more adverse of an effect it will have on home prices.’

As such, Fitch is projecting a further 5% to 10% decline in home values nationally next year.

Recoveries on distressed loans will also be negatively affected by the increased expenses of loss mitigation and foreclosure. Due to loan modification efforts and servicer process issues, the average number of months between a troubled borrower's last payment and the property liquidation date has grown to 19 months – the highest level on record.

Fitch projects that figure to increase by at least six months in 2011, even if the recent problems related to foreclosure affidavits are resolved quickly. The extended timelines generally result in higher interest-carry costs and property-maintenance expenses.

However, several factors could help stem rising loss severities, according to Fitch Managing Director Diane Pendley.

‘Servicers are increasingly turning to less-costly alternatives to foreclosure such as short sales,’ she says. Short sales generally experience recovery rates about 10% higher than foreclosure sales. Since 2009, the percentage of distressed-loan sales that ended with the servicer acquiring the property declined from 80% to 60%.

‘Servicers are also reducing the amount of payments they advance to the securitization trust on behalf of delinquent borrowers,’ adds Pendley. This trend is particularly evident among subprime loans. In November, Fitch reported that servicers only advanced on approximately 60% of delinquent subprime loan payments – down from approximately 90% of such payments at the beginning of 2009.

The combination of less-costly foreclosure alternatives and reduced servicer advancing is expected to mitigate, but not entirely offset, the negative pressure on recovery trends from weakening home prices and increased liquidation timelines, Fitch says.

SOURCE: Fitch Ratings


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