The increased use of short sales drove foreclosure rates to near all-time lows and slowed the decline of loss severities for residential mortgage-backed securities, according to data from ratings agency Fitch Ratings, HousingWire reported April 15.
Fitch’s Loss Severity Index for the first quarter of 2013 improved to 64.2 percent from 67.5 percent from the first quarter of 2012. The index measures the percentage of loans that are seriously delinquent (90 or more days late) among private-label securitized loans.
“Along with home price improvements, the increased use of short sale liquidations is now helping to reverse the trend of rising mortgage loss severities,” Sean Nelson, a director at Fitch, told HousingWire.
According to the index, short sales generally resulted in higher recoveries on distressed loans because mortgage servicers allowed borrowers to sell their properties for less than the mortgage amount rather than forcing banks to sell the homes as foreclosures. Fitch projects the recent positive loss severity trends would continue through 2013.
“Timelines to liquidation are much shorter compared to the full foreclosure process and the sale avoids the stigma of being a banked-owned property,” Nelson said, HousingWire reported.
Fitch reported that while short-sale rates declined in the first quarter, they still accounted for more than half of all resolutions and remained the most common resolution for nonperforming loans.
The average timeframe for loans settled through short sales was approximately 12 months shorter than those liquidated through real-estate owned properties. Severities on short-sale liquidations averaged 10 to 15 percent lower than REO properties, HousingWire reported.
“The increased average timelines for loans remaining in the foreclosure process may also reflect some adverse selection of properties not resolved through short sales,” Fitch noted, HousingWire reported.