For the past several months, residential mortgage-backed securities servicers underwent a seachange for underperforming residential loans, analysts claim.

In general, loan modifications slowed notably while short sales become the reputed 'order of the day.'

For private-label loans, short sales by bank servicers peaked at 51% in Nov. 2012, an increase from 20% two years previously, according to the newest quarterly index from Fitch Ratings.

Short sales among non-bank servicers also increased, peaking at 16% in Oct. 2012 from 11% two years earlier.

"Loan modifications have fallen due partly to overall declines in mortgage delinquencies," said Diane Pendley, managing director for Fitch Ratings.

She added, "However, they may also have fallen out of favor since many modified loans have already failed and do not qualify for another modification."

For banks, the percentage of loans in the 90-plus delinquent category dropped notably to 10.5% compared to 21% in large part due to the use of short sales.

The percentage of loans in foreclosure trended upward to a high of 20.5% in the second half of 2011 before dropping to 16.5% by the end of 2012, but remains the largest segment, Fitch explained.

"This is driven more by the extending timelines for loans in this segment than by the number of new loans moving into foreclosure," the report stated.

Prime borrowers are more likely to accept a short sale, with 64% of recent liquidations being sold as short sales, the credit rating agency noted.

Thus, the increased use of short sales may be the result of servicer’s efforts to reduce the impact of foreclosure on borrowers with re-defaulted loan mods.

Currently, the modification re-defaults after 24 months are 24% for prime, 36% for Alt-A and 43% for subprime, respectively.

Another interesting trend is the wide disparity between bank and non-bank servicer practices in various areas such as use temporary staffing and most notably, permanent staffing levels.

Bank staffing levels declined with defaulted loans either being resolved or transferred, following a marked increase in late 2010, according to Fitch.

At the same time, non-bank staffing levels increased as their portfolios continue to grow. 

"Increased use of non-bank servicers has been particularly evident on subprime loans due in party to their more aggressive use of loan mods and short overall timelines," Pendley concluded.