RMBS Loss Severities to Rise 5-10% on Rising Costs and Weakening Home Values

by: Research Recap

Loss severities on distressed U.S. residential mortgage loans are likely to increase an additional 5-10% from current levels due to higher loss mitigation and foreclosure expenses and weakening home values, according to the latest RMBS Performance Metrics results from Fitch Ratings.

The anticipated increases for each sector’s average loss severities are expected to be as follows:

  • Prime loans: currently 44%, increasing to 49%-54%;
  • Alt-A loans: currently 59%, increasing to 64%-69%;
  • Subprime loans: currently 75%, increasing to 80%-85%.

Prior to the recent negative trends, loss severities had remained stable for over a year. Beginning in second quarter-2009 (2Q’09), recovery values had been supported by an improvement in home prices brought on by low mortgage rates, homebuyer tax credits and government directed loan-modification programs. From 2Q’09 through 2Q’10, home prices jumped approximately 6% nationally and almost 12% in California according to the Case-Shiller Index.

However, the positive momentum in home prices is not sustainable, according to Managing Director Grant Bailey. ‘With the tax credits expired and a high inventory of distressed properties remaining to be sold, the housing market faces significant challenges in 2011,’ said Bailey. ‘The higher the glut of unsold properties on the market, the more adverse of an effect it will have on home prices.’

As such, Fitch is projecting a further 5-10% decline in home values nationally next year.