Fewer Catching Up on Lapsed Mortgages

I believe this article illustrates the challenge and reluctance banks have with extending loan modification terms to borrowers who are delinquent in making their mortgage payments. Some sobering facts.....


By JAMES R. HAGERTY, Wall Street Journal

Homeowners who fall behind on their mortgage payments have become much less likely to catch up again, a new study shows.

The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month.

Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2%. In the subprime category, the rate has declined to 5.3% from 19.4%.

"The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch.

Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1.

Cure rates have sunk despite the Obama administration's prodding of banks to ease terms for millions of borrowers to try to prevent foreclosures. Without those loan-modification efforts, cure rates would be even lower.

Job losses have left some borrowers unable to make payments. In addition, Mr. Slump said, some who could continue to make payments probably are no longer willing to. That may be because the values of their homes have fallen below their loan balances and they see little hope of ever recovering their investments.

What's more, because of widespread backlogs and delays in the foreclosure process, people who quit paying may be able to stay in their homes for more than a year before being evicted.

The Fitch study covers about $1.7 trillion of mortgages held in securities, representing about 16% of U.S. mortgages outstanding.