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Huge Plunge In Mortgage Cure Rates Portends Housing Market Foreclosure Disaster

Housing-Market / US Housing Aug 25, 2009 - 01:14 AM GMT

By: Mike_Shedlock

Housing-Market

Best Financial Markets Analysis ArticleMortgage cure rates have fallen off a cliff. For those unfamiliar with the term, a "cure rate" pertains to those who go delinquent on loans then catch up and become current. Late payments that don't "cure" have a tendency to get later and later over time, before they eventually default.


Fitch ratings notes Cure Rates Plunge Among Prime RMBS.

According to Fitch, cure rate on prime mortgages plunged to 6.6% from an average 45% during 2000-2006. Alt-A cure rates plunged to 4.3% from an average 30.2% and subprime cure rates fell to 5.% from an average 19.4%.

A couple of charts can help put this in context. Here is a chart from Hidden Backlog of Foreclosures.

Pent Up Foreclosures By State



In regards to the above chart I said.

The area in pink represents potential foreclosure demand. Not all of that area will be foreclosed, but some of it sure will. The "Hidden Backlog" mentioned above (and highlighted in red) is within that pink area.

One thing missing from the chart is pent-up demand from those who are not delinquent yet have a huge incentive to walk because of massive negative equity.

For a look at "negative equity", moratoriums, and other foreclosure issues please see Brace for a Wave of Foreclosures, the Dam is About to Break.

With the new data from Fitch let's take a second look using another chart from Calculated Risk's post MBA Forecasts Foreclosures to Peak at End of 2010.

Prime Delinquencies and Foreclosures


In 2006 less than 3% of prime loans were delinquent and nearly half of them cured. Currently close to 6.5% of prime mortgages are delinquent (another 3% are in foreclosure). Worse yet, the cure rate is miserable. Even reworked loans quickly sink back into delinquency.

A key reason for the falling cure rates pertains to underwater mortgages. In 2006, someone might easily have had positive equity in their home and sold it (curing the loan). Most in trouble now do not have positive equity and cannot sell.

Of the 6.5% delinquent, the current cure rate is a mere 6.6%. On this basis, prime foreclosures could spike to 9%. If that sounds preposterous, note that prime delinquencies were close to 3% in 2007 and by second quarter 2009 the foreclosure rate hit that same 3% rate. Foreclosures follow delinquencies over time and a sinking cure rate makes that prognosis even more likely.

What happens now depends on jobs and home prices, neither of which looks very promising. Even 5-6% prime foreclosures would be a disaster and that looks increasingly likely.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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