Rising Prices, Shrinking Delinquencies Reduce Future RMBS Losses
05/22/2013 BY: ESTHER CHO
As home values improve and servicers continue to ramp up efforts to reduce delinquent pipelines through short sales and loan modifications, the composition of RMBS loan pools outstanding should also improve, according to Moody’s most recent ResiLandscape.
According to analysts from Moody’s, rising home prices motivate current borrowers to avoid default, and they increase the proportion of current loans with loan-to-value (LTV) ratios below 100, which are the loans that are the least likely to go incur losses.
The higher share of current loans with lower LTVs should then prevent new defaults for 2005-2008 RMBS pools, according to Moody’s.
In addition to rising prices, the analysts stated shrinking delinquent loan pipelines also work to lower future pool losses. For example, by liquidating delinquent loans through short sales rather than through foreclosure, servicers are able to reduce loss severities.
“A quickening pace of property liquidations will lower eventual pool losses because properties that spend less time in foreclosure and REO accrue fewer expenses and expose the related RMBS to lower loss severities,” the report stated.
The steady, but slightly faster pace in which servicers are modifying loans also helps to reduce delinquencies and future loan losses, according to Moody’s.
“[J]udiciously applied modifications can help to reduce loan losses because they keep cash flowing from troubled borrowers who might otherwise have stopped making payments,” the analysts wrote.
Currently, the delinquent loan modification rate is down from its 2010 peak, but modifications have increased over the past year due to servicers offering second and third modifications, while the 12-month re-default rate on modified loans has actually gone done, Moody’s reported.