Fitch Ratings: Expiring Housing Incentives Likely to Increase Loan Losses this Year

FitchrnRatings is warning that the expiring homebuyer tax credits, the end of the Fed's MBS Purchase Program, and the growingrnmaturity of various government loan modifications programs are likely tornincrease loss severities on distressed mortgage loans later this year. 

Thernreport says that these factors as well as low interest rates and the FederalrnReserve's $1.25 trillion mortgage-backed securities purchase program have ledrnto an improvement in both home prices and loss severities since the secondrnquarter of 2009, but this is unlikely to continue. 

The $8,000 tax credit for first-timernhomebuyers and $6,500 credit for move-up buyers will be effectively expiringrnwith the deadline for signed sales contracts on April 30.  Buyers must complete the sale by June 30 sornany drop off in sales figures will not be apparent until the third quarter butrnFitch forecasts that the expiration of the program as well as the end of thernFederal Reserve's purchases to increase negative pressure on both home prices andrnloss severities.

FitchrnSenior Director Grant Bailey expects that loans that are found to be ineligiblernfor government sponsored loan modification programs or failed modifications willrnalso add to the supply of depressed residential inventory that will depress thernmarket.  “Servicers are furtherrnalong in identifying borrowers ineligible for modifications and will likely be morernaggressive in liquidating these loans this year compared to last.”

Baileyrnsaid that short-sales result in loss severities that are approximately 10rnpercent lower than losses on loans that are foreclosed or the deed taken inrnlieu of foreclosure so these more rapid and less costly alternatives may helprnstem rising loss severities.  The impactrnof the seasonal increase in real estate activity in the spring may also delayrnthe immediate impact of the end of government support programs.

The Fitch report said that loss severityrntrends continue to be strongly dependent on home price trends.  In the two years prior to the recentrnimprovement, national home prices dropped approximately 30 percent while thernseverity of loss on loans which incurred losses doubled to record highs of 43rnpercent for private-label prime loans, 58 percent of Alt-A loans, and 72rnpercent for subprime loans.

The release is available at FitchRatings.com. (Logins required, but free)

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