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You Call This a Cure?

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A few weeks ago, I cited a report from the Boston Federal Reserve showing why mortgage modifications were failing.

One of the top reasons was the so-called "cure rate" of seriously delinquent mortgages. According to the Boston Fed, 30% of all seriously delinquent mortgages "cure" without a mortgage modification, meaning the homeowner behind the mortgage eventually returns to normal, on-time, monthly payments.

But for whatever reason, a new report put out by Fitch Ratings on Monday shows this 30% number is probably way, way too high.

The Fitch report, as my colleague Toby Shute first pointed out, suggests the cure rates on delinquent mortgages were probably around 30% during the boom years, but have since fallen off in big way.

Among its findings:

Mortgage Type

2000-2006 Cure Rate

Current Cure Rate










Ouch. In short, this shows that once homeowners fall into delinquency, the odds they'll pull themselves out is pretty slim.

Moreover, a summary of the report notes that "up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to redefault." Yes, they do. And that means the actual cure rate is probably lower than even these new numbers show.

Why do the current numbers diverge from the (albeit short) historical trends? "An increasing number of borrowers who are 'underwater' on their mortgages appear to be driving this trend," says one summary of the report's findings. This makes sense: When a homeowner owes more on a mortgage than the home is worth, their incentive to stop making payments, even if they can still afford them, grows. Rising unemployment could be another reason. People either can't, or don't want to, stay in their homes.

What's it all mean for the banks holding these loans? As Fitch Managing Director Roelof Slump points out, "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."

All this suggests is that for housing-heavy banks -- including Bank of America (NYSE: BAC  ) , Wells Fargo (NYSE: WFC  ) , and JPMorgan Chase (NYSE: JPM  ) -- the stabilization in early-stage delinquencies some have pointed to as signs of life in the housing market could be drowned out by the increasing final number of those delinquencies turning into actual losses. On that matter, total delinquencies are still rising at a pretty heavy clip.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (9)

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  • Report this Comment On August 25, 2009, at 1:19 PM, MKArch wrote:

    So you average the cure rates from a drive by recession through the height of a housing/ credit bubble fueled peak in the economy and compare it to cure rates at the bottom of the worst recession in modern history and tell me this has some sort of relevance? Wow the cure rates in an a economy at ~9.5% unemployment rate are worse than they were when unemployment rates were averaging 4%-5%. Let me know what the cure rates are like in a year or two when the economy is healthy again or do you have some stat that will show this time is different we will not recover from this recession?

  • Report this Comment On August 25, 2009, at 3:07 PM, memoandstitch wrote:

    The key word here is "eventually" as in

    "the homeowner behind the mortgage eventually returns to normal"

  • Report this Comment On August 26, 2009, at 11:00 AM, TMFBent wrote:

    "Ouch. In short, this shows that once homeowners fall into delinquency, the odds they'll pull themselves out is pretty slim."

    I saw some research a while back that said it was the underwaterness, baby. Even those who can pay don't want to if they don't feel like it's worth it.

    I had a link to it in my caps blog at one point, but I'm having trouble digging it out.

  • Report this Comment On August 26, 2009, at 5:48 PM, MKArch wrote:

    Hi Seth as one of my TMF guru's I respectfully disagree with the theory that under water is the main determinant in delinquency. The reason why I think this is wrong is because I'm joe average, I grew up in Joeaverageville, I deal with Joe average people every day of my life and I have never heard any Joe average homeowner talk about walking away from their house because they are underwater. IMHO the big point you are missing in the statistics you cite is perspective. There are two camps of real estate owners the vast majority of people who bought a house to live in and a minority but unusually large this time around group of owners who bought property specifically as an investment (read developers and flippers).

    The investor owners bailed right away while real owners have been holding on if they can or struggling to hold on if they are in financial trouble. IMHO the stats that showed a large portion of defaults were people under water is evidence that there were a lot of flippers and that they all bailed right away but is not indicative that everyone who is underwater is looking to bail. Also people who are underwater almost certainly bought just recently and owe a whole lot more than say someone who bought 15 years ago and therefore have a harder time staying current during financial distress than someone who owes a lot less. So again being less able to keep up with payments as opposed to worrying about being underwater could and I'm sure is a big part of the reason why stats show a large number of delinquencies are from underwater home owners. In this case underwater is a symptom not the cause.

    I've got a lot of respect for you Seth as one of my guru's but I think it's a little unfoolish to rely on a stat without putting it into perspective. I just don't buy the underwater= delinquency argument as I just don't hear real people discussing this, I just hear financial analyst discussing it.


  • Report this Comment On August 27, 2009, at 8:33 AM, MKArch wrote:

    Forgot to add one to my list. For most people the purchase of an automobile is a significant chunk of change that in just about 100% of the cases is significantly underwater the moment you drive it off the dealers lot. Unlike houses that can and most likely will recover in price there is virtually no hope that your autos value will ever do anything but go down and eventually be worthless. How many people do you know that do a U turn out of the dealers parking lot and return the keys because they are now underwater? Since virtually all owned cars are underwater that would mean that just about 100% of cars owners delinquent on their payments are underwater. Does this mean that everyone who is underwater on their car payments is about to turn in the keys?

    BTW getting back to houses how normal people even know what the current market value of their house is? IMHO real home owners are a lot smarter than you guys give them credit for they know that even though the housing market is down right now the long term trend is up and it's highly likely their house will appreciate significantly over 15-20-30 what ever period of time they own it.


  • Report this Comment On September 01, 2009, at 2:13 AM, jimhenry0109 wrote:

    I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.

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