Market Overview

Fitch: U.S. RMBS Loss Severities to Rise 5-10% on Rising Costs & Weakening Home Values

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NEW YORK--(BUSINESS WIRE)--

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 though 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.

Recoveries on distressed loans will also be negatively affected by increased servicing costs. Due to loan modification efforts and servicer process issues, the average number of months between a troubled borrower's last payment and the property liquidation date has grown to 19 months, the highest level on record. Fitch projects that figure to increase by at least six months in 2011 even if the recent problems related to foreclosure affidavits are resolved quickly. The extended timelines generally result in higher interest-carry costs and property-maintenance expenses.

However, several factors could help stem rising loss severities, according to Managing Director Diane Pendley. 'Servicers are increasingly turning to less costly alternatives to foreclosure such as short-sales,' said Pendley. Short sales generally experience recovery rates about 10% higher than foreclosure sales. Since 2009, the percentage of distressed-loan sales that ended with the servicer acquiring the property declined from 80% to 60%. 'Servicers are also reducing the amount of payments they advance to the securitization trust on behalf of delinquent borrowers,' said Pendley. This trend is particularly evident among subprime loans. In November, servicers only advanced on approximately 60% of delinquent Subprime loan payments, down from approximately 90% of such payments at the beginning of 2009.

The combination of less-costly foreclosure alternatives and reduced servicer advancing is expected to mitigate, but not entirely offset, the negative pressure on recovery trends from weakening home prices and increased liquidation timelines. As a result, Fitch anticipates increasing loss-severity projections for outstanding seasoned RMBS transaction rating reviews to be completed in coming months. Loss severities will be analyzed and projected for each mortgage pool based on pool-specific attributes and trends. Higher loss-severity assumptions will have negative rating implications, particularly for bonds that already have a Negative Rating Outlook.

Fitch's RMBS Performance Metrics, released monthly, combines loan level data from Fitch Ratings and LoanPerformance to show delinquency trends, roll rate movement and loss rates across vintage, sector, and mortgage type. The report also includes data on mortgage servicing trends, such as modification activity and advancing percentages, as well as a summary of bond rating changes.

RMBS Performance Metrics are available at 'www.fitchratings.com' under the following headers:

Sectors >> RMBS >> Tools >> Performance Metrics

Additional information is available at 'www.fitchratings.com

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Inc.
Grant Bailey, +1-212-908-0544
Managing Director
1 State Street Plaza, New York, NY 10004
or
Diane Pendley, +1-212-908-0777
Managing Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

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