Loss severities for mortgage bonds continue to sluggishly improve even as home prices make gains, Fitch Ratings reported this week.
Home prices grew roughly 14% nationally, and even as much as 30% locally in states such as California.
However, loss severities have only improved 5% since the fourth quarter of 2011. While investors in residential mortgage-backed securities may have been hoping to benefit from rising prices during the liquidation process, liquidation timelines are growing, offsetting the potential for larger gains.
"Longer timelines translate to higher servicer advancing and property maintenance costs, which cut into the higher liquidation proceeds afforded by the home price environment," said Fitch director Sean Nelson.
He added, "On average, distressed loans that liquidated in third quarter-2013 hadn’t made a payment in 32 months. This is nearly twice as long as the average liquidation timeline in 2008."
The increasing focus by servicers on loan modifications and other alternatives to foreclosure continues to reduce the number of liquidations. Nonetheless, it has also contributed to higher severities on loans considered for — but not ultimately received — a foreclosure alternative as a result of additional time required.
Consequently, a rapid improvement in loss severities isn’t expected in the short term as timelines continue to increase.
The average liquidation timelines reached 32 months in the third-quarter, which is more than twice as long as average timelines during the housing heyday.
However, lower severities for loans that are currently performing may default in the future.
Interestingly enough, timelines for loan remaining in foreclosure or real estate-owned properties reached an all-time high in the third quarter, increasing at a faster rate in 2013 than in any prior year.
For instance, 32% of seriously delinquent loans have not made a payment for more than four years, up from 7% at the start of 2012, Fitch noted.
"As the inventory of distressed properties declines to a more manageable level, timelines are expected to improve," Nelson said.
He continued, "Lower loan-to-value ratios and shorter liquidation timelines should lead to meaningfully lower severities for loans that liquidate two to three years from now."
