Mortgages: Less Hope For Delinquent Borrowers
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For all the talk regarding mortgage modifications, the open secret has been fairly clear: Most modifications are failing. Once behind most people do not catch up.
According to Fitch Ratings, so-called cure rates for delinquent prime loans — the highest quality loans — have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month.
Fitch Managing Director Roelof Slump says that prime cure rates have dropped to 6.6%, 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%.
“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 Slump.
The general deterioration in home prices appears to be a key driver in the worsening cure rate behavior, according to Fitch.
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%. Since home price declines have been relatively more severe in certain areas such as California and Florida, these areas tend to have a higher degree of representation in the non-current category.
While California and Florida represent 49% of the remaining outstanding balance of currently performing prime loans, these states make up 62% of the non-current category and are under-represented in the ‘cured loan’ category as well. Furthermore, up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.
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