Fitch
Ratings is warning that the expiring homebuyer tax credits, the end of the Fed's MBS Purchase Program, and the growing
maturity of various government loan modifications programs are likely to
increase loss severities on distressed mortgage loans later this year.
The
report says that these factors as well as low interest rates and the Federal
Reserve's $1.25 trillion mortgage-backed securities purchase program have led
to an improvement in both home prices and loss severities since the second
quarter of 2009, but this is unlikely to continue.
The $8,000 tax credit for first-time
homebuyers and $6,500 credit for move-up buyers will be effectively expiring
with the deadline for signed sales contracts on April 30. Buyers must complete the sale by June 30 so
any drop off in sales figures will not be apparent until the third quarter but
Fitch forecasts that the expiration of the program as well as the end of the
Federal Reserve's purchases to increase negative pressure on both home prices and
loss severities.
Fitch
Senior Director Grant Bailey expects that loans that are found to be ineligible
for government sponsored loan modification programs or failed modifications will
also add to the supply of depressed residential inventory that will depress the
market. "Servicers are further
along in identifying borrowers ineligible for modifications and will likely be more
aggressive in liquidating these loans this year compared to last."
Bailey
said that short-sales result in loss severities that are approximately 10
percent lower than losses on loans that are foreclosed or the deed taken in
lieu of foreclosure so these more rapid and less costly alternatives may help
stem rising loss severities. The impact
of the seasonal increase in real estate activity in the spring may also delay
the immediate impact of the end of government support programs.
The Fitch report said that loss severity
trends continue to be strongly dependent on home price trends. In the two years prior to the recent
improvement, national home prices dropped approximately 30 percent while the
severity of loss on loans which incurred losses doubled to record highs of 43
percent for private-label prime loans, 58 percent of Alt-A loans, and 72
percent for subprime loans.
The release is available at FitchRatings.com. (Logins required, but free)
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