As the backlog of foreclosures continues to drive down housing prices, losses on private-label residential mortgage backed securities (RMBS) will increase in 2011, according to ""Moody's Investors Service"":http://www.moodys.com.
[IMAGE]The New York-based rating agency's forecast for more red ink seeping from home loans packaged and sold to investors comes despite the fact that it believes the rate at which loans in securitizations become delinquent will decline during the year.
Moody's expects the flaws in foreclosure practices that have come to light over the last several months to delay foreclosures by three to six months, further extending the window of losses for investors.
As servicers take corrective actions on foreclosure paperwork that's been called into question, Moody's warns that costs associated with the relevant loans will increase.
""As the new year progresses we should get a better sense of which servicers will bear remedial foreclosure costs and to what extent and which of them will pass them on to the RMBS trusts and ultimately to investors as additional losses,"" Moody's analysts said in their 2011 outlook report.
Amita Shrivastava, a Moody's VP and senior analyst who co-authored the report, went on to explain, ""The heightened scrutiny of foreclosure proceedings by borrowers and judges in general will lead to additional foreclosure costs and delays. However, given already high loss expectations on RMBS pools, and assuming servicers bear the costs of their malfeasance, these delays and higher costs will not have a material impact on our expected recoveries.""
[COLUMN_BREAK]Moody's says it expects loan modifications that include principal forgiveness to lower mortgage delinquency rates.
""Treasury's recent guidance, calling on the servicers to make principal forgiveness a part of loan modifications, is likely to improve performance of existing RMBS,"" said Shrivastava. ""Principal forgiveness, which has been absent in previous modification programs, should help prevent borrowers with negative equity in their homes from re-defaulting on their loans.""
The expected increase in losses, but decrease in the rate at which loans become delinquent, in 2011 follows a year during which the performance of the loans backing RMBS largely stabilized, Moody's said.
The company's analysts also expect RMBS issuance to remain limited in 2011 as the market awaits the government's promised proposal on GSE reform and implementation of new legislative and regulatory rules for securitizations as mandated by the Dodd-Frank Act.
Moody's says securitization costs are likely to be higher than the cost of other funding sources because of new requirements for governance mechanisms and asset verification. In addition, the agency asserts that new regulatory rules requiring originators to retain a 5 percent vertical slice of the securitization may result in lenders avoiding securitization.
An additional factor weighing down on private label RMBS issuance for 2011 is the government's extension of the higher GSE loan limit, according to Moody's. The company says the increased loan limit, $729,750, has already been partially responsible for shrinking the non-conforming jumbo market.
""The high cost of securitization and compliance with the increasing layers of regulation, along with the extension of the GSE loan limits, will continue to make accessing the private label RMBS market an uneconomical funding option for most mortgage lenders."" said Todd Swanson, a Moody's AVP and analyst.
Swanson added, ""The transactions that do come to market will likely have a very strong credit profile as a result of high quality assets, an increased alignment of interest between issuers and investors, increased disclosure of collateral and structural information, and structural mechanisms to monitor and enforce breaches of representations and warranties.""