The estimated 2012 total return on the non-agency market is 21%, said Amherst Securities in its non-agency mortgage market monitor for December.

In December, the non-agency market total return was 2.23%, outperforming most other sectors.

The non-agency market size is 1.5% smaller at $933.3 billion as of the December remittance period, down from $947.5 billion in November. Thus, there are slightly more than 3.9 million loans left, down from 4.5 million a year ago.

Overall loan modifications were 17,792 for the month, down from 23,218 in November, which fell back in line with prior months. Loan modifications have averaged 18,503 per month over the past year.

The share of principal modifications continued to rise, representing 53% of subprime modifications, 56% of Option adjustable-rate mortgage modifications and 26% in primes and 39% in Atl-A.

Click on the graph to view the share modification types.

This was driven by activities in both the large banks covered in the AG settlement and Ocwen, the report said.

Ocwen completed the acquisition of Homeward last month. The portfolio is expected to show increased modification and lower advance rates at the conclusion of the transfer, the report stated.

The combined amount of re-performing and non-performing loans decreased by $6 billion month-over-month to $490.6 billion, reflecting an increase of $0.3 billion in the re-performing bucket, a tightening of $6.3 billion in the non-performing bucket.

Re-defaults were an estimated $8.7 billion in December, up from $8.5 billion in November.

Non-performing loans shrunk in size from $276.3 billion to $270 billion. Fewer loans are moving into the non-performing loan bucket via default than are moving out of the NPL bucket by either liquidation or by modification or self cure.

The non-performing loan bucket continued to shrink for 36 consecutive months, from a peak of $439.9 billion in December 2009, strongly arguing for a lower dollar volume of distressed supply going forward.

The liquidation rate of the non-performing loan bucket was 25.9% per annum in December, up from 23.2% per annum liquidation rate in December 2011.

"Even with a higher liquidation rate, liquidations volumes were down sharply over the past year because of the smaller size of the NPL bucket," the report said.

Liquidation volumes totaled $6.8 billion this month, down from $7.7 in December 2011.

The roll rates from 90-plus days delinquent to foreclosure have been in "a fairly tight range" for the past year. However, this trend has continued to decline over the last few months.

Click on the graph to view foreclosure roll rates.

Servicers exhibiting the lowest roll rates are Bank of America (BAC)/Countrywide – who came to a multibillion dollar mortgage settlement deal with Fannie Mae Monday – and JPMorgan Chase (JPM)/Washington Mutual.