While the number of U.S. prime RMBS loans rolling into a delinquency status has recently slowed, this improvement is being overwhelmed by the dramatic decrease in delinquency cure rates that has occurred since 2006, according to Fitch Ratings. 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%. It is important not only to observe total roll rates, but delinquency cure rates as well, according to Managing Director Roelof Slump.
'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 Slump. 'While prime has shown the most precipitous decline, rates have dropped in other sectors as well.'
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%, and subprime is down to 5.3% from an average of 19.4%. '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 general deterioration in home prices appears to be a key driver in the worsening cure rate behavior. Due to home price declines, loans that have recently become delinquent have an effective loan to value ratio that is on average approximately 23% higher than those loans that are current on their payments, and are typically over 100%. Since home price declines have been relatively more severe in certain areas such as California and Florida, these areas tend to have a higher degree of representation in the non-current category.
While California and Florida represent 49% of the remaining outstanding balance of currently performing prime loans, these states make up 62% of the non-current category and are under-represented in the 'cured loan' category as well. Furthermore, up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.
Recent data shows prime current-to-delinquency rates at 89% of the December 2008 levels, though new rolls-to-delinquency are still elevated when compared to historical standards. Recently observed three-month average roll rates of 1.1% are nearly twice the level seen from the 2000 through current averages for prime. Additionally, the gross roll rates do not reveal some additional important information relating to prime loan performance.
Other stresses may also be playing a part in the worsening cure rates. Although current credit score information is not generally available for all borrowers, some significant differences are noted between the original credit profiles of the current and delinquent prime loans. On average, current prime loans had credit scores at origination that are seen to be 25 points higher than the delinquent loans. Also, the loans that are current have shown a higher percentage of full income documentation than those that have recently become delinquent. '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,' said Slump.
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. 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.