Low property valuations and steep sales discounts reduce the proceeds from liquidated loans by almost a third, according to ""Moody's Investors Service"":http://www.moodys.com.
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As home prices drop, equity erosion drives most of the losses incurred on defaulted mortgage loans, but the analysts at Moody’s say in today’s environment that’s not the whole story.
They maintain that loss projections based solely on average home prices substantially underestimate a foreclosed property's actual loss severity.
""Our analysis shows that liquidated properties are subject to discounts on their valuation and price that, on average, lead to selling prices that are about 30 percent lower than average home values,"" Moody's said.
The agency's analysts examined 46,000 loans liquidated since 2007 in order to measure the effect of foreclosure on a property's value.
They found that on average, a foreclosed property will be valued about 18 percent lower than average home prices,
[COLUMN_BREAK]and will be subject to an additional sales discount of about 15 percent.
Liquidated properties drop in value more than home price depreciation would imply primarily because they are likely to be in worse condition than a similar property without a distressed loan, Moody’s explained.
The extent of valuation and sales markdowns vary widely, however, and depend on loan characteristics such as the product type, loan purpose, property type, and balance size.
In general, properties located in judicial states lose more value than those in non-judicial states. Moody’s attributes this finding to the fact that loans in judicial jurisdictions face longer foreclosure timelines that allow the property to deteriorate more severely.
Loans for investment properties and second homes fared worse than loans for primary residences in terms of value reductions. Moody’s points out that owner-occupants are generally more involved in property upkeep than tenants.
Lower-balance loans generally are subject to higher valuation discounts. Moody’s says fixed maintenance costs and the financial means of the owner may explain why the values of properties with smaller balance loans deteriorate more than those of higher balance loans.
Alt-A and option adjustable-rate mortgages (ARMs) lose more value than subprime loans, and they all see significantly larger discounts than jumbo loans. According to Moody’s inflated appraisals at origination are likely the culprit of the more sizeable value reductions down the road, especially for Alt-A and subprime loans originated in 2006 and 2007.