In Tuesday’s Mortgage Strategy Weekly, FTN Financial analysts said that the speed of liquidation and loss severities within the RMBS market have a strong correlation.
They also highlighted the key differences among mortgage servicers in liquidation timelines, noting that there is considerable variation in liquidation efficiency between servicers even when the dataset is restricted to a single state.
“Not surprisingly, the longer a property sits in foreclosure status, the greater the loss severity,” analysts said.
Although both 60day+ delinquencies and the current-to-30day delinquent roll rates have stabilized or dramatically fallen from peak levels for all non-agency MBS products, the speed at which servicers are able to take properties from foreclosure to liquidation has yet to improve or even stabilize, analysts said.
They added that the legal requirements, which often vary from state to state, can often explain the liquidation timeline’s slowness. For instance, data presented by the firm illustrated that the timelines have a tendency to be longer in states that primarily use a Judicial foreclosure process, although some states employ both Judicial and non-Judicial methods.
However, the legal differences between states only partly explains the disparity in liquidation speeds. Critical variations among servicers still exist even within states, analysts said.
“We would not necessarily advise against purchasing bonds serviced by one of the less efficient liquidators,” analysts said. “But for these servicers, higher expected severities must be utilized in stress testing.”
Analysts also suggested that bonds with poor-performing servicers might still be a great investment at the right price. However, they warned investors to look at all the subtle differences such as servicer liquidation timelines by state before making an investment decision. Analysts said that buerss should expect higher severities for bonds that are serviced by an “inefficient liquidator” of foreclosed properties
Analysts also noted another difference among servicers that investors should be aware of is the P&I Advance Rate.