Saturday, June 30, 2012

Losses on RMBS Set to Rise as Support Programs Expire

Loss severities on distressed U.S. residential mortgage loans are likely to rise this year as several key government support programs expire, according to Fitch Ratings.

Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have led to an improvement in home prices and loss severities since second quarter-2009. But the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.

Additionally, an increase in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market. ‘Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last,’ said Bailey. ‘Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution.’

Loss severities on loans resolved through short-sales are approximately 10% lower than loss severities on loans in which the servicer takes possession of the property. Additionally, the seasonal increase in housing activity through the summer may delay the full impact of the withdrawal of the government support programs until later this year.

In the two years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.

No comments:

Post a Comment