Short sales may be partially responsible for the falling of first-lien severities in most non-agency sectors, according to securitization research Friday by Barclays Capital (BarCap). Mark-to-market loan-to-value shifts and the rising share of short sales in recent liquidations can mostly explain the severity declines. But the trend is unlikely to keep up, as BarCap researchers project loss severities will increase in the first half of 2010 due to worse house price appreciation, rising short sale severity and larger advancing costs on liquidations. Severities should level off by the second half of the year. Severities fell over the past five months alongside an uptick in house prices and implementation of government modification programs. House price appreciation alone cannot account for the whole 4-5% drop in magnitude seen across multiple sectors. Lower mark-to-market loan-to-value trends account for half the drop in severity among first liens, BarCap said. Lower severities among a higher count of short sales has also helped along the trend. "One way to explain the unexplained component of the recent severity decline is to attribute it to a compression in the distressed discount that is being demanded by new homebuyers," BarCap said. "Anecdotally, there have been reports of large-scale investor buying of distressed properties over the past few months. Investors are less likely to have psychological inhibitions about buying foreclosed homes and could bid up prices." Write to Diana Golobay.