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Prolonged liquidation timelines shake up home prices

Alt-A, prime RMBS outperform loss severities

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Timelines on distressed inventory continue to drag on, while elevated mortgage loss severities continue to offset positive gains on home prices.

Consequently, liquidation timelines continue to extend for distressed residential mortgage-backed securitization loans, according to Fitch Ratings.

"Home prices have increased roughly 10% national over the last year, yet loss severities have not improved at the same pace," explained Fitch director Sean Nelson.

Liquidations increased 32.2 months for the third quarter, up from 31.1 months for the second quarter, and also up from 28.3 months a year ago.

In aggregate, timelines have increased every quarter since the fourth quarter of 2008 and remain at historical highs.

While the composition of distressed inventory continues to evolve, fewer loans are rolling into delinquency and a higher percentage of short sales.

Nonetheless, the most seasoned inventory continues to prove difficult to liquidate, skewing aggregate timelines higher.

"The percentage of distressed mortgages that are five or more years delinquent has tripled just in the last year," Nelson said.

Subprime loss severities have remained flat with timelines in excess of 34 months and home price gains lower than the national average.

With respect to the observed loss severities, Odeon Capital expects this trend to continue in the near term, explained Odeon senior vice president Jui Chiew Tan.

"[This is] because better housing prices are negated by the realization of previously unrecognized historical forbearance losses," Tan stated.

He added, "This unrecognized forbearance loss can be quite drastic during servicing transfers."

However, loss severities for prime and Alt-A RMBS have fared better, improving roughly 5% year-over-year, Fitch noted.

These properties experienced shorter liquidation timelines than subprime loans, and are concentrated in areas that produced higher home price growth than the national average, the credit ratings agency concluded. 

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