Short Sales Continue to Drive Losses Lower

Loss severities for U.S. RMBS will continue their slow decline this year due in part to the increased use of short sales, according to Fitch Ratings in its latest mortgage market index. Fitch's Loss Severity Index improved to 64.2 percent for the first quarter of 2013, down from 67.5 percent in the first quarter of 2012. Drivers of the improved loss severity rate include increased short sale percentages, fewer servicer advances on missed payments, and increased home prices. "Along with home price improvements, the increased use of short sale liquidations is now helping to reverse the trend of rising mortgage loss severities," said Director Sean Nelson. In a short sale, the servicer allows the borrower to sell their property on their own for less than the mortgage amount. Short sales typically result in higher recoveries on distressed loans. "Timelines to liquidation are much shorter compared to the full foreclosure process and the sale avoids the stigma of being a bank-owned property," said Nelson. Fitch's Loss Severity Index is published quarterly and highlights performance trends in legacy and new issue RMBS, house price conditions and mortgage market developments. Fitch's Loss Severity index measures the percentage of loans that are seriously delinquent among U.S. private label, securitized mortgage loans.