Foreclosure filings and completed foreclosures will reach record levels this year, after lenders exhaust alternatives such as mortgage modifications, according to DBRS. Analysts expect increased losses to residential mortgage-backed securities, as a result, because large inventories of foreclosed homes will be sold at deep discounts. The ratings agency also expects the federal government to continue calling for large-scale loan modifications in 2011. This will now affect loans such as option adjustable-rate mortgages because most of the delinquent subprime mortgages have already been modified. DBRS projects delinquency trends to continue climbing this year, as negative home equity persists, home prices remain down, unemployment stays high, and many borrowers have trouble refinancing due to tightened underwriting standards. Analysts said the number of REO properties could double over the next 12 months to 4 million from 2 million, and it will take at least one to two years to sell those homes, further hindering recovery. DBRS said servicers may turn to short sales and some government programs more often this year to sell these distressed properties. Analysts pointed to the “first look” program the Department of Housing and Urban Development rolled out in September as one option. The program gives local nonprofits or borrowers a chance to bid on a house at a 1% discount of the appraised value before investors. More regulatory reform will come to mortgage servicers in 2011, analysts said, “as the industry tries to recover from the revelations that were brought about over the last few months including robo-signing foreclosure affidavits, wrongfully foreclosing on military families and the inability of servicers to prove in court that they owned the mortgage loans.” Servicing fees are likely to increase because lenders and servicers need to find ways to pay for additional staff and increased litigation costs, while compensating borrowers for errors, according to DBRS. Write to Jason Philyaw.

More: