As servicers better adapt to new federal regulation, the foreclosure versus mortgage loan workout momentum is finally changing, opening the way for the nonconforming market to return.

The long-dreaded “shadow inventory” backlog of foreclosures is clearing up to open the way for loan modifications and short sale alternatives, according to the DBRS Inc. U.S. Residential Mortgage Servicing Review and 2013 Outlook.

As a result, according to DBRS senior vice president, operational risk, Kathleen Tillwitz, the nonconforming market may start to return “albeit at a slow pace.”

DBRS finds foreclosure filings and completed foreclosures are expected to decline in 2013.

Contributing factors, Tillwitz said, include continued high unemployment rates, strict borrower credit underwriting standards that limit new originations and help keep home prices deflated.

At the same time, she notes, these market developments will continue to keep losses from securitized residential mortgage loans at high levels, along with real estate owned inventory losses due to deep discount sales that cause “writedowns in transactions particularly the subordinate tranches.”

In addition, Tillwitz said, the issuance of the final Consumer Financial Protection Bureau rules “alleviates ambiguity for servicers” and could bring “much needed reform to the servicing industry.”

Since many of the items outlined in the rules have been in draft form for quite some time many mortgage loan servicers have already adopted the changes into their servicing operations, Tillwitz argues, now “servicers are well poised for growth,” as they continue efforts to prevent foreclosures and stimulate the housing market in 2013.

Furthermore, tighter mortgage loan underwriting standards issued by the CFPB that make it more difficult for borrowers to purchase or refinance make renting a more attractive alternative and will further boost private investor interest in REO-to-rent properties, she said.

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