Since the 2008 financial crisis, servicers dealing with loans tied to residential mortgage-backed securities have changed with the times – moving from a sharp focus on loan modifications to short sales.
A new report from Fitch Ratings claims over the last few years, loan modifications have slowed as the preferred choice for servicers dealing with distressed loans.
Instead, short sales are ‘in’ as the preferred strategy among U.S. RMBS servicers, says Fitch managing director Diane Pendley.
Short sales for non-agency loans peaked at 51% in November 2012 when analyzing the disposition methods of bank servicers, Pendley said. That is up 20% from two years earlier.
"Short sales among non-bank servicers have also increased, peaking at 16% in October 2012 from 11% two years prior," she added.
Loan modifications also are down as mortgage delinquencies drop, Pendley said. Yet, they also are falling, with short sales now a more popular disposition choice, especially when dealing with prime borrowers.
A decline in loan mods also may be a sign that some borrowers no longer qualify for modifications after receiving mods in the past. Failing to qualify for another modification means a short-sale transaction becomes a more likely outcome.
Short sales currently make up 64% of liquidations among prime borrowers, the ratings giant said.
In the Alt-A segment, short sales represent 53% of liquidations, while short sales make up 42% of subprime resolutions, based on Fitch data.
"The increased use of short sales may also be the result of servicer's efforts to reduce the impact of foreclosure on borrowers who have re-defaulted loan modifications," Pendley writes. "Currently, the modification re-defaults after 24 months are 24% for prime, 36% for Alt-A, and 43% for subprime."
What’s interesting to Pendley is how much the market is now driven by non-bank servicing firms.
Staffing levels at bank servicers have declined since late 2010 with more loans resolved or transferred, Pendley said.
But non-bank servicers are adding staff as their portfolios increase. Pendley says these firms are now pulling in more of the banks business since they are able to aggressively use loan mod strategies while producing shorter resolution timelines.