Historically speaking, nearly half of the people who have become delinquent on their mortgages would start paying again as common setbacks like job losses or illness would be overcome allowing for missed payments to be made up. It’s different this time around as a growing percentage of homes go under water due to the outsized percentage losses in values across the country. Now, even when homeowners do overcome their temporary setbacks, hardly anyone who has stopped paying their mortgage gets around to catching up on their delinquencies and starts making regular payments again. It’s a behavior that has no historical precedence and has therefore taken the industry by surprise.

Borrowers that used option ARM mortgages have the additional burden of payments that have gone up, in many cases, precipitously. For them getting re-hired, recovering from an illness, or overcoming other types of setbacks simply isn’t enough to compensate for a mortgage which has reset to a level that would have been out of reach regardless of the remedy. The understanding common amongst industry watchers when the subprimes started defaulting en masse was that these foreclosures were part of the territory of making risky loans and that the problems seen with those mortgages would be contained to that category. The average percentage of self cures in the subprime mortgage category was the lowest relative to others even during the boom from 2000 to 2006, at 19.4%. Since then it has worsened to 5.3%. That the percentage of homeowners that could or would self cure was remarkably low surprised no one.
What has surprised the experts is the drop off in self cures in the mortgage category reserved for the strongest borrowers; prime loans. While the number of U.S. prime loans going into delinquency has slowed slightly, this improvement is being overwhelmed by the dramatic decrease in delinquency “cure rates” that has been building since 2006, according to Fitch Ratings. “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 Fitch Rating’s Managing Director Roelof Slump. “While prime has shown the most precipitous decline (of self cures), rates have dropped in other sectors as well.” 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%.

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%. “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 self cure percentages could actually be much lower due to the fact that 25% of reported self cures are actually the result of loan modifications. Fitch is also assuming that self cure rates, at least for the prime loan category, will get worse before they get better saying, “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.”

Regardless of some of the tentative stability being seen in the housing market and the economy in general, it will be difficult to argue that the market has reached bottom or that performance has improved until self cure rates increase dramatically. That improvement will be critical in the prime mortgage category. This is especially true in the prime sector, which remains at a performance level 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. Another wild card in the mix will be the performance of the jumbo prime category, which is also beginning to show cracks in the foundation. The rate of 60-day delinquencies on jumbo prime mortgages jumped to 7.4% in May, from 4.5% in November, according to First American CoreLogic. By comparison, 60-day delinquencies on prime-conforming loans reached 4.9% in May, from 3.6% in November.
A recent report from the Federal Reserve Bank of Boston had concluded that banks were dragging their feet in processing loan modifications due to historically high self cure rates, arguing that banks would be reluctant to modify the terms on a mortgage when there was a good chance that the borrower would be able to catch up on payments without the bank’s assistance. The realization that self cures are but a fraction of what they used to be, government pressure on lenders and servicers to proceed faster with loan modifications, and the building oversupply of the inventory of foreclosed homes could spur banks to become much more amenable to approving home loan modifications.
The Feldman Law Center has achieved positive outcomes for hundreds of homeowners seeking loan modifications. Call them today (800) 527 8497.