Not Many Recovering from Home Loan Delinquency

Well last week we had good news – this week it looks like more bad news. A new study conducted by Fitch Ratings Ltd. and reported in the Wall Street Journal found that home owners who start to miss mortgage payments are not that likely to get caught up again.

The report looked at the “cure rate,” or the percentage of delinquent home loans that are brought current each month (The study did not include government-backed loans and loans not bundled into securities. This means only about 16 percent of all U.S. mortgages are represented in the report).

The numbers are bleak when compared on a historical scale, an indication that those predicting millions more foreclosures in the next couple years may be right. In July of this year the cure rate for delinquent prime loans fell to 6.6 percent. Compare that with an average of 45 percent during the period of 2000 to 2006. Yikes!  Subprime loans had a cure rate of 5.3 percent in July, a major decrease from the average of 19.4 percent in the six-year time frame.

Fitch blamed job loss as a major contributing factor to the collapsed rates. Yet one of the main differences in borrowers now as opposed to those in the past is that even many who can afford to make their payments are simply choosing not to, feeling that their underwater mortgages are not worth saving.

Unfortunately, in some cases they may be right. As the bloated housing markets of former real estate hot spots continue to correct themselves, home prices are often still moving downward, making a $500,000 mortgage on a home now worth roughly half that amount seem like a hopeless cause. Some homeowners make think, “Why keep paying this impossibly high mortgage, when I can go into foreclosure, rent and repair my credit for several years and then buy at reasonable market prices?”

And for those of us living in those places like California and Florida waiting to buy homes, as sad as foreclosure can be, each one helps to bring the home prices back down into an affordable range. Sorry to those unlucky enough to have bought or done cash-out refis during the housing bubble, but the rate of growth was never sustainable and a painful recovery was always going to be the end product.

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