The housing recovery is providing confidence to mortgage firms to finally close the chapter on the most troubled loans.
According to research from Barclays (BCS), gains in home prices and increased short sales pushed down mortgage severities by up to 5% last year. This good news now means mortgage servicers can turn attention to loans that are the worst performing; or borrowers who stopped paying their mortgage three years ago.
In an email to clients, Barclays estimates 40-45% of loans in subprime and 25-40% in Alt-A/prime fall into this bucket. Liquidations of these mortgages are expected to double in the next year or two, from a rate of 25% to up to 50%.
It's shows a reverse course, considering that delinquency timelines inched up in the past few years.
Furthermore, the investment bank's note on residential credit, also anticipates a rise in redefaults of modified mortgages.
"Overall we expect severities to remain on the high side for the next 6-12 months as the long timeline loans increase as a share of liquidations before stabilizing in 2014- 2015," said the analysts. "At the same time, as redefaults increase as a proportion of all liquidations, we expect severities to fall strongly."
The increase in liquidations of the most severe liquidations is also expected to increase for the next five years.