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RMBS Liquidations Increase for the First Time in Almost Two Years

Annualized liquidations of United States RMBS loans increased last quarter for the first time in seven quarters, according to a report issued Monday by Fitch Ratings.

The conditional Default rate increased in Q2 2014 to 4.92 percent after nearly two years of declines from 9.76 percent in Q2 2012. The previous decline was spurred on by shrinking inventories of distressed properties and a decrease in the use of short sales.

Analysts are pointing to the increase on in REO properties, which will generally liquidate a faster rate than those properties that are in other stages of foreclosure, large contributor to the increase.

“More distressed mortgage loans are making their way through the foreclosure pipeline into REO and those properties are generally sold quickly" said Director Sean Nelson. “The turnaround in liquidation rates has also been supported by greater home buyer demand fueled by low mortgage rates and warmer weather.”

The process used to foreclose also matters. Most of the declines in liquidation over the past seven quarters have been predominantly seen in states that have a non-judicial foreclosure process, where the percentage of loans more than 90 days delinquent has dropped from its 2009 high of 27 percent to a much more manageable 15 percent.

Conversely, the rate of properties 90 plus days delinquent in judicial foreclosure states has remained static at 35 percent.

"Non-judicial states are disposing of distressed loans faster than judicial states, and their distressed inventory is now less than half the size of judicial states," said Nelson.

Obviously, the judicial foreclosure process, employed by 22 states nationwide, has many steps and is more slow-going than non-judicial foreclosures because the court acts as an intermediary rather than the process being proscribed by state statute. It makes sense that inventories in judicial foreclosure states would be higher.

Still, with foreclosure rates on the decline, inventories should decrease as properties continue to be liquidated and fewer new foreclosures replace them.

About Author: Derek Templeton

Derek Templeton is an attorney based in Dallas, Texas. He practices in the areas of real estate, financial services, and general corporate transactional law. His experience includes time as an Attorney Adviser for the U.S. Small Business Administration and as General Counsel for a nonprofit organization in Dallas. A self-avowed "policy junkie," he has a keen interest in the effect that evolving federal policy has on the mortgage, default servicing, and greater housing industries.
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