While the number of U.S. prime residential mortgage-backed securities 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, the rating agency adds.
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 current level of 6.6%.
"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," says Fitch's managing director, Roelof 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.
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.
On average, current prime loans had credit scores at origination that are seen to be 25 points higher than the delinquent loans, Fitch observes. 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," Slump says.
Fitch says 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.
SOURCE: Fitch Ratings