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Banks Still Losing Money on Foreclosures

NEW YORK ( TheStreet) -- Despite rising home prices, banks and mortgage investors are seeing only a slow improvement in the amount of money they can recover from the liquidation of a foreclosed home.

According to a report from Fitch Ratings, loss severities on liquidated properties, loosely defined as the percentage of the unpaid principal that is lost when a home is foreclosed upon, are just 5% below their peak levels.

In other words, banks are still losing heavily on foreclosed properties.

This is despite the fact home prices have risen 14% nationally and 30% in California since the end of 2011, which means banks should be getting a relatively higher price now when they sell foreclosed homes.

But the increase in home prices is apparently being offset by the lengthening timeline to liquidate a property that has added to costs for servicing the property.

Average liquidation timelines reached 32 months in the third quarter of 2013, more than twice as long as in 2008.

Mortgage servicers have over the past few years increasingly worked to resolve problem loans through alternatives such as loan modifications and short sales and have sought to avoid the costly and onerous foreclosure process.

Foreclosure starts have dropped to record lows while loan modification rates are at record highs.

As a result, loans that do finally wind up in foreclosure these days are those that have exhausted all other options. These are loans that have been in default for a considerable amount of time.

According to Fitch, 32% of the seriously delinquent loans in the foreclosure pipeline have not made a payment in four years. Of those loans, more than 40% are legacy Countrywide originations serviced by Bank of America (BAC - Get Report).

Fitch expects extended liquidation timelines would increase loss severities for loans currently in the foreclosure and REO(bank repossessed homes).

For loans that are currently performing but likely to default in the future, however, the severities could be lower. That's because currently performing loans tend to have stronger credit characteristics such as a lower loan to value, which should mitigate the losses, according to Fitch.

-- Written by Shanthi Bharatwaj New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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