As the backlog of foreclosures continues to drive down housing values, losses on private label MBS will increase in 2011, according to a new report from Moody's Investors Service.
But on the other hand, Moody's has some good news for PLS investors: the rate at which loans in securitizations become delinquent should decline during the new year.
As a percentage of original balance, cumulative losses from December 2009 to November 2010 for the 2005-2008 vintage deals grew to 14.9% from 11.8% for subprime pools, to 9.5% from 5.7% for payment ARM pools, and to 7.9% from 5.2% for alt-A MBS.
At last check, according to figures compiled by National Mortgage News and the Quarterly Data Report, there are roughly $634 billion of subprime mortgages outstanding in the U.S., down from about $1 trillion from the peak of the market three years ago.
Almost all of these nonprime loans have been securitized. Unfortunately the delinquency rate on subprime mortgages, according to NMN/QDR, is 34% with foreclosures at 17%.
Moody's expects that flaws in foreclosure processes -- such as the 'robo-signing' scandals – will delay property seizures by lenders by three to six months. "As servicers take corrective actions, costs associated with the relevant loans will increase," it said.
Loan modifications that include principal forgiveness will lower delinquency rates, the rating agency said. "Treasury's recent guidance, calling on the servicers to make principal forgiveness a part of loan modifications, is likely to improve performance of existing RMBS," writes Moody's analyst Amita Shrivastava in the report. "Principal forgiveness, which has been absent in previous modification programs, should help prevent borrowers with negative equity in their homes from re-defaulting on their loans."
