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Long Liquidation Times Ramp Up Loss Severities Despite Rising Prices

While home prices have risen 14 percent nationally since their trough a few years ago, ""Fitch Ratings"":http://www.fitchratings.com/web/en/dynamic/fitch-home.jsp points out in a recent report that loss severities on residential mortgage-backed securities (RMBS) have improved only ""modestly.""

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Loss severities improved just 5 percent over the past year, according to Fitch's report, titled ""U.S. RMBS: Why Aren't Loss Severities Improving Faster?"" The primary reason for the slow improvement, the ratings agency concluded, is prolonged liquidation timelines, which ""reached an all-time high in third-quarter 2013 and increased at a faster rate in 2013 than in any prior year.""

In fact, 32 percent of seriously delinquent homeowners have not made a payment on their mortgage in more than four years. This is up drastically from 7 percent at the start of last year, according to Fitch. About 40 percent of the mortgages that have been seriously delinquent for the past four years are legacy Countrywide loans now serviced by Bank of America, Fitch says.

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The average liquidation timeline is 32 months, as of the third quarter of this year, the ratings agency's study showed. Fitch says this is twice as long as the 2008 average.

Several events have led to increasing liquidation timelines over the past few years. Fitch names the introduction of the Home Affordable Modification Program (HAMP) and the investigation and national foreclosure lawsuit that led many servicers to halt their foreclosure processes as two major contributors.

Amid this environment, the rate of seriously delinquent loans transitioning into foreclosure reached an all-time low, according to Fitch's records. Meanwhile, loan modification rates approached an all-time high.

While timelines are raising loss severities, short sales, which have risen from 20 percent of liquidations in 2009 to 60 percent currently, are lowering loss severities.

In fact, short sales on homes with subprime loans incur loss severities about 20 percent lower than loss severities incurred on REO sales, according to Fitch.

For now, Fitch does not expect any declines in loss severities, but moving forward, the agency expects lower loss severities on currently performing loans that fall delinquent.

""Lower mark-to-market loan to values, greater amortization, and improved timelines due to more manageable numbers of distressed properties should lead to meaningfully lower severities for loans that liquidate two to three years in the future,"" Fitch said.

""On average, performing loans have stronger credit characteristics, including lower current loan-to-value ratios and shorter remaining terms,"" Fitch added.

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