Longer foreclosures squeeze investor profit

Fitch: Loss severities rise for first time in years

Fitch Ratings sent a note today warning that extended foreclosure timelines are increasing the severity of losses in residential mortgage-backed securities.

Loss severities on liquidated RMBS loans rose last quarter following six straight quarters of declines, according to a statement from Fitch.

"Judicial foreclosure states were a particular problem spot with respect to longer timelines last quarter, even as timelines in non-judicial states start to level off," said Fitch director Sean Nelson. "Longer liquidation timelines result in higher loss severities due to greater carry costs and higher potential for property deterioration."

According to the report, Fitch cites the dwindling use of short sales as one reason for the longer liquidations. Skipping the short sale means the borrower must then be placed into foreclosure if the loan does not return to performing status. REO sales are also less common than short sales, currently, and timelines in judicial states continue to increase, notably in Florida and New York.

On the other hand, the rate of foreclosure completions in nonjudicial states remained level.

Furthermore, mortgage servicers, who advance payments regardless of borrower performance continue to do so, but at a slower rate. In fact, the rate at which servicers advanced missed borrower payments increased in the fourth quarter as well, the first time since the onset of the financial crisis, the Fitch report states.

"Average timelines for loans remaining in the foreclosure process continued to extend, reflecting both the increased procedural challenges servicers face due to regulatory changes and some adverse selection of properties not resolved through short sales," according to the report.

There are some bright notes for mortgage investors. Home prices increases from the last two years help offset extended liquidation timelines.

However, Fitch believes certain regions remain overvalued where "price growth is not supported by underlying fundamental drivers."

While today's loss severity report did not mention any markets by name, recently Fitch criticized housing fundamentals in San Francisco.

San Francisco prices are getting closer to levels reached in the 2006-2007 bubble when the median Bay Area price hit the $665,000-mark, sounded a recent Fitch warning.

Additionally, a recent report from RealtyTrac noted a recent uptick in foreclosures and short sales, though these findings would not yet factor into Fitch Ratings data until the next report.

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