Print“Cure rates,” the percentage of borrowers who recover on their own after falling delinquent on their mortgages, may not be as great as previously assumed, according to a new report from Fitch Ratings.
The consequences are significant. Policymakers may be forced to recalculate their foreclosure projections and lenders may find they have a greater motivation to modify prime loans in delinquency than they previously believed.
As unemployment drives more and more prime lenders into default, lenders have assumed that 20 to 40 percent of those in default 30 to 60 days will find a way to become current on their mortgage payments.
“More than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted,” found a recent study by the Federal Reserve of Boston.
But Fitch maintains those assumptions are based on the cure rates of defaulters before the housing crisis began in 2006. Cure rates for prime loans have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. In addition, Alt-A cure rates have dropped to 4.3%, from an average of 30.2%, and subprime is down to 5.3% from an average of 19.4%.
The Fitch study suggested that the principle cause of the decline in cure rates is the fact so many more borrowers owe more on their homes today than they are worth because of declining property values. “The general deterioration in home prices appears to be a key driver in the worsening cure rate behavior. Due to home price declines, 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%,” the study found.
Credit scores also contributed to the declining cure rates. “On average, current prime loans had credit scores at origination that are seen to be 25 points higher than the delinquent loans,” the study found
“Regardless of aggregate roll-to-delinquent behavior, it will be difficult to argue that the market has stabilized or that performance has improved, until there is a concurrent increase in cure rates. This is especially true in the prime sector, which remains performing many times worse than historic averages. Prime 60+ delinquencies have more than tripled in the past year, from $9.5 billion to $28 billion total, or roughly $1.6 billion a month,” Fitch concluded.
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