An uptick in the use of short sales is slowing the decline of loss severities for residential mortgage-backed securities, according to Fitch Ratings.
The credit rating agency’s Loss Severity Index improved to 64.2% for the first quarter of 2013, down from 67.5% from the same time period last year. Key drivers of the enhanced loss severity rate included increased short sale percentages, fewer servicer advances on missed payments as well as improving home prices.
The index measures the percentage of loans that are seriously delinquent among private-label securitized loans.
"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, a director at Fitch.
Since the servicer allows the borrower to sell their own property for less than the mortgage amount in a short sale, the short sale generally results in higher recoveries on distressed loans, the index explained.
"Timelines to liquidation are much shorter compared to the full foreclosure process and the sale avoids the stigma of being a banked-owned property," Nelson said.
As a result, the recent positive loss severity trends are expected to continue through 2013, the index said.
Meanwhile, foreclosure completion rates decreased to near historical lows, as servicers sought alternatives to foreclosures and worked to implement regulatory changes to their procedures.
While short sales rates declined in 1Q, they remain the most common resolution for nonperforming loans, which account for more than half of all resolutions, Fitch said.
Furthermore, the average timelines for loans liquidated through short sales are about 12 months shorter than those liquidated through real estate-owned properties, and severities on short sale liquidations are between 10% and 15% lower on average, according to Fitch.
"The increased average timelines for loans remaining in the foreclosure process may also reflect some adverse selection of properties not resolved through short sales," the index stated.