Loss severities on distressed RMBS loans will probably increase this year as several key government support programs expire, Fitch Ratings said in a report.

Low mortgage rates, homebuyer tax credits and government directed loan-modification programs have resulted in an improvement in home prices and loss severities since 2Q09.

However, the expiration in the coming months of both the homebuyer tax credit and the Federal Reserve's $1.25 trillion MBS purchase program will increase negative pressure on home prices and loss severities, according to Senior Director Grant Bailey.

Additionally, a rise in the liquidation of loans with unsuccessful loan modifications is expected to add to the supply of distressed inventory in the housing market.

"Servicers are further along in identifying borrowers ineligible for modifications and will likely be more aggressive in liquidating those loans this year compared to last," Bailey said. "Less costly alternatives to foreclosure, such as short-sales, should help stem rising loss severities due to the lower costs and speed of the resolution."

Loss severities on loans resolved through short-sales are around 10% lower compared with loss severities on loans in which the servicer takes possession of the property. Moreover, the seasonal rise in housing activity through the summer can delay the full impact of the government's withdrawal of its support programs until later this year.

Loss severity trends continue to be strongly dependent on home price trends, as shown in Fitch's most recent RMBS Performance Metrics results.

In the couple of years prior to the recent improvement, national home prices dropped approximately 30% while loss severities on loans which incurred losses doubled to record highs of 43% for private-label Prime loans, 58% for Alt-A loans and 72% for Subprime loans.

Fitch's RMBS Performance Metrics combines loan level data from Fitch Ratings and LoanPerformance to show delinquency trends, roll rate movement and loss rates across vintage, sector, and mortgage type.

The report also included data on mortgage servicing trends, such as modification activity and advancing percentages, as well as a summary of bond rating changes.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.