Rising U.S. home prices haven’t boosted the performance of mortgage bonds as much as might be expected, and Fitch Ratings says this is due to the length of time and amount of money it takes to sell repossessed homes.
Home prices have increased roughly 14% nationally and 30% in California since the fourth quarter of 2011. That suggests banks should be able to command higher prices for homes that they repossess, all other things being equal, than they could a couple of years ago. Yet loss severities, the amount of principal that is not recouped upon sale, have only improved 5% over the same time frame, according to Fitch.
The rating agency said the key factor offsetting home price gains has been extending liquidation timelines, or the time it takes after a borrower has stopped making payments to repossess a home and put it on the market. The longer this takes, the more interest payments loan servicers must advance to the securitization trust and the more banks must spend maintaining a vacant property. Both costs are deducted from sale proceeds.
“Longer timelines translate to higher servicer advancing and property maintenance costs, which cut into the higher liquidation proceeds afforded by the home price environment,” director Sean Nelson said in a report published today.
On average, he said, distressed loans that liquidated in third quarter of this year hadn't made a payment in 32 months. This is nearly twice as long as the average liquidation timeline in 2008.
Fitch does not expect rapid improvement in loss severities in the short term as the time required to unload repossessed homes continue to increase. However, Fitch does project lower severities for loans that are currently performing and may default in the future. That’s because, as the inventory of distressed properties declines to a more manageable level, timelines are expected to improve.
“Lower loan-to-value ratios and shorter liquidation timelines should lead to meaningfully lower severities for loans that liquidate two to three years from now,” said Nelson.