Back in the good old days, nearly half of the people who were delinquent on their mortgages would start paying again. But now, thanks in large part to people owning more on their mortgage than their house is worth, hardly anyone who has stopped paying their mortgage gets around to “curing” their delinquency and paying it off again.
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.
Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month. Cure rates have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. …
‘Recent stability of loans becoming delinquent do not take into account the drastic decrease in delinquency cure rates experienced in the prime sector since the peak of the housing market,’ said [Managing Director Roelof Slump]. ‘While prime has shown the most precipitous decline, rates have dropped in other sectors as well.’
In addition to prime cure rates dropping 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.
… Furthermore, up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.
… ‘As income and employment stress has spread, weaker prime borrowers become more likely to become delinquent in their loan payments and are less likely to become current again,’ said Slump.
Regardless of aggregate roll-to-delinquent behaviour, it will be difficult to argue that the market has stabilised 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.
We mentioned this earlier today but it deserves emphasis because it helps explain why default rates are much higher than any would have predicted. Historical models of borrower behaviour just never captured how ruthlessly borrowers would react to being deeply underwater.
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