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Fewer Borrowers Able to Recover from Delinquency

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A decline in mortgage delinquency is being threatened by a lack of delinquency cures, according to a new report. The quickly worsening cure rates are impacting prime borrowers as well as nonprime borrowers.

The share of delinquent mortgages that eventually become current again has been falling dramatically, Fitch Ratings reported today.

Between 2000 and 2006, the average prime mortgage cure rate was 45 percent, according to the ratings agency. But cure rates on prime mortgages are now averaging just 6.6 percent. On Alt-A loans, cure rates are down to 4.3 percent from 30.2 percent, while subprime cure rates have fallen to 5.2 percent from 19.4 percent.

Fitch said the deterioration is being driven by the growing number of borrowers with negative equity. Fitch noted that effective loan-to-values on delinquent loans is around 23 percent higher than on current loans. LTVs on delinquent loans often exceed 100 percent..

“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,” Roelof Slump, a Fitch managing director, said in the report. “While prime has shown the most precipitous decline, rates have dropped in other sectors as well.”

The report indicated that although less than half of outstanding prime mortgages which are current are secured by California and Florida properties, the two states account for 62 percent of delinquent loans.

Fitch also noted that as many as one-quarter of loans considered cured were modified — not a good sign given the high re-default on modified loans.

The report said that delinquent borrowers had a credit score that was 25 points worse at origination than borrowers who are current. This finding seems to add some credibility to the predictive power of credit scores.

Full documentation was more prevalent among current loans.

“Regardless of aggregate roll-to-delinquent behavior, it will be difficult to argue that the market has stabilized or that performance has improved, until there is a concurrent increase in cure rates,” Fitch said. “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.”

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