Rise in Prices, Use of Short Sales Lead to Declining Loss Severities

Rising home prices and higher levels of short sales are leading to declining loss severities in the residential mortgage-backed securities (RMBS) market, according to ""Fitch Ratings."":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp The agency's quarterly report noted its Loss Severity Index declined from 67.5 percent in the first quarter of 2012 to 64.2 percent in the first quarter of this year.

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Loss severities on short sales tend to be 10 to 15 percent lower than loss severities on REOs, according to Fitch. Also, short sales are generally resolved about 12 months sooner than REOs, the agency stated.

""Along with home price improvements, the increased use of short sale liquidations is now helping to reverse the trend of rising mortgage loss severities,"" said Sean Nelson, director at Fitch Ratings.

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Short sales actually declined slightly in the first quarter of this year, but they still outpace other liquidation strategies for nonperforming loans, according to Fitch.

The decline in short sales and changes in the regulatory environment led to increased liquidation timelines in the first quarter.

Completed foreclosures plummeted in the first quarter amid the regulatory changes and landed near historical lows, according to Fitch.

However, the market did experience improvement in delinquencies over the quarter with 60+ day delinquencies declining from 28.7 percent to 27.9 percent and the delinquency roll rate declining from 2.6 percent to 2.4 percent.

Delinquency improvements can be attributed to ""positive selection among remaining borrowers, improved re-default rates of modified loans and positive home trends,"" according to Fitch.

Delinquencies for loans issued since 2005 will likely continue their current decline, according to Fitch.

Rising home prices, which also played a role in declining loss severities in the first quarter, may not persist, according to Fitch.

The agency suggests ""home prices remain slightly above sustainable levels are at risk for further declines."" A particular area of concern is the Northeast.