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 |
|---|---|---|
|
Prime |
45% |
6.6% |
|
Alt-A |
30.2% |
4.3% |
|
Subprime |
19.4% |
5.3% |
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.
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