Loss Severity May Reverse Recent Stability: Amherst

Mortgage loan loss severities may have leveled off in recent months, although the latest mortgage insight study from Amherst Securities Group expects a modest increase in severity in coming months.

The increase may arrive due to further drops in house prices, continued increases in liquidation lags and less favorable geographic distribution of liquidations, Amherst said in mortgage-backed security (MBS) market commentary Tuesday.

But the firm sees “temporary” stabilization of house prices, as 7.5m units or 13.5% of US homeowners are in non-payment status. Amherst previously explained its reasoning for calculating 7m of those are “destined” to liquidate, which hangs a shadow of distressed inventory over the positive signs seen in the US housing market.

House prices may decline as much as another 8 to 10%, Amherst said, indicating loss severity will increase further.

Although lower interest rates have made for lower annual costs of principal and interest advances, which facilitated faster liquidation timelines. But interest rates are unlikely to drop any farther, Amherst said, and any increase would drag on the time to liquidation.

The geographic differences in liquidation time also threaten to increase loss severity.

For example, “Florida loans, which have very high severities, take a long time to liquidate,” said Amherst strategist Laurie Goodman. “Thus the liquidation rate on these loans has been low to date. These loans will liquidate in the next wave, pushing up severities.”

Write to Diana Golobay.

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