Foreclosure Defects to Prolong U.S. Housing Correction

by: Research Recap

The in-flux state of U.S. mortgage foreclosures will increase an already high ’shadow’ inventory and lengthen foreclosure delays, both of which figure to prolong the U.S. housing correction, according to Fitch Ratings.

Liquidation timelines of non-performing loans are already at historical highs. It would take over three years to clear the existing distressed mortgage inventory in the non-agency RMBS sector based on recent resolution trends, a timeline that Senior Director Grant Bailey says will be further pushed back by the delay in foreclosures.

The foreclosure and liquidation extensions will slow the resolution of defaulted loans and delay home prices from finding a floor. Also, extending foreclosure times will weigh on U.S. RMBS loss severities due to rising carrying costs.

Rising losses also leaves U.S. RMBS more susceptible to negative rating actions, though downgrades and Negative Outlook revisions will likely be contained to bonds that already have a Negative Rating Outlook.

Fitch has contacted its rated servicers to ascertain whether they are implementing more stringent foreclosure procedures. Fitch is also re-assessing its assumptions for the timing of loan liquidations and loss severities, with new criteria due out in the near future.