With the expiration of several key government support programs looming, loss severities on distressed U.S. residential mortgage loans are likely to escalate, Fitch Ratings recently reported.
Low mortgage rates, homebuyer tax credits, and government-directed loan modification programs have led to an improvement in home prices and loss severities since the second quarter of 2009, but these positive trends may not continue. Grant Bailey, senior director of Fitch, said the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve’s $1.25 trillion mortgage-backed securities (MBS) purchase program will increase negative pressure on home prices and loss severities.
An increase in the liquidation of loans with unsuccessful loan modification is also expected to add to the supply of distressed inventory in the housing market. Bailey said servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans compared to last year. However, he explained that 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.
According to Fitch, loss severities on loans resolved through short sales are approximately 10 percent lower than those on loans in which the servicer takes possession of the property. In addition, Fitch said 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.
Loss severity trends continue to be strongly dependent on home price trends, as shown in Fitch’s most recent RMBS Performance Metric results. In the two years prior to the recent improvement, national home prices dropped approximately 30 percent, while loss severities on loans which incurred losses doubled to record highs of 43 percent for private-label prime loans, 58 percent for Alt-A loans, and 72 percent for subprime loans.
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