No "Cure" for Mortgage Delinquencies

Some really startling numbers today from Fitch Ratings on delinquency "cure rates." That's the percentage of delinquent loans returning to a current payment status each month. "Cure rates have declined from an average of 45 percent during 2000-2006 to the currently level of 6.6 percent," according to today's report titled, "Delinquency Cure Rates Worsening for U.S. Prime RMBS."

While the number of U.S. prime RMBS loans rolling into a delinquency status has recently slowed, this improvement is being overwhelmed by the dramatic decrease in delinquency cure rates that has occurred since 2006, according to Fitch Ratings. An increasing number of borrowers who are ‘underwater’ on their mortgages appear to be driving this trend, as Fitch has also observed.

In addition, Alt-A cure rates have dropped to 4.3 percent from an average of 30.2 percent, and subprime is down to 5.3 percent from an average of 19.4 percent. "Whereas prime had previously been distinct for its relatively high level of delinquency recoveries, by this measure prime is no longer significantly outperforming other sectors," said managing Director Roelof Slump. To make matters worse, up to 25 percent of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.

The overwhelming culprit in the cure rate is price. "Loans that have recently become delinquent have an effective loan to value ratio that is on average approximately 23% higher than those loans that are current on their payments, and are typically over 100%," according to the Fitch report. That makes modifications, refis, and home sales that much harder.

There's been a lot of talk of recovery in housing over the past two months, mostly on the backs of increased home sales and housing starts. Without an increase in cure rates, we will only see more foreclosures, and in turn more distressed inventory, pulling home values down even further.