Report: Short Sales Replacing Mods as New Norm

Among the available foreclosure prevention tools, short sales are becoming the weapon of choice for servicers while the use of loan modifications has slowed, data from ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp revealed.

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For example, among bank servicers, the percentage of resolutions in the loan modification category decreased to 26 percent in the last half of 2012 from 57 percent in the first half of 2010, according to Fitch's latest quarterly index.

However, for nonbank servicers, loan modifications are ranged between 69 to 71 percent during the same time period.

Meanwhile, short sales showed significant increases over the last couple of years. In 2012, short sales represented 51 percent of resolutions for bank servicers, up from a low of 20 percent in 2010. For nonbank servicers, short sales grew to 16 percent in 2012, up from 11 percent in 2010.

""Loan modifications have fallen due partly to overall declines in mortgage delinquencies,"" explained Diane Pendley, managing director at Fitch. ""However, they may also have fallen out of favor since many modified loans have already failed and do not qualify for another modification.""

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In instances where modifications are not possible, the rating agency explained servicers will look to a short sale, which allows servicers to save by avoiding the cost of dealing with a foreclosure.

Fitch also compared staffing levels for banks and nonbanks, noting a diverging trend. In late 2010, bank staffing levels expanded rapidly as banks worked to address the high level of defaults, but they are now reducing their staff as defaulted loans become resolved or transferred. Nonbank services though have shown a need to expand in response to their growing portfolios.

Banks also tend to higher more temporary employees, at 12 percent on average, compared to about 3.5 percent for nonbank servicers, according to the report.

In addition, the number of loans per employee is much higher for banks though the number has decreased significantly over the last two years from about 800 to about 500 in 2012. Nonbank servicers have kept their loan per employee numbers lower, averaging around 275.

Fitch also found nonbanks have shorter timelines when resolving 60-plus delinquencies. For nonbanks, it takes about 14 months to resolve loans through a repayment, modification, short sale or foreclosure, while banks take about 22 months to resolve a delinquency.

One reason for the difference could be the requirements for banks under the national mortgage settlement, as well as the difference in staffing levels, according to Fitch.

Though, Fitch anticipates the playing field may become more even in days ahead.

""[W]ith nonbank servicers coming under the regulatory control of the CFPB and a large portion of the banks' defaulted or high risk product moving to their portfolios, nonbank servicers will be challenged to maintain this advantage,"" the report stated.