Delinquent borrowers more likely to stay behind on mortgage payments

A new report from Fitch Ratings shows that borrowers who fall behind on their mortgages are having an impossible time getting caught up again.

The Wall Street Journal reports (subscription required) that "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%."

There are a few factors at work that are driving this trend:
  • People are losing jobs and not finding new ones with great speed. A record 4.97 million people had been unemployed six months or longer in July, and the average unemployed person has been out of work 25.1 weeks -- which is also a record. People fall behind on mortgages when they lose jobs and then, historically, have been able to get caught up when they find work again. That isn't happening right now.
  • A record 33% of mortgages -- and possibly higher -- are underwater, leaving some people with little incentive to get caught up on payments, especially when the foreclosure process has lengthened because banks and courts are overwhelmed with cases. For many home owners, pouring money into an underwater mortgage feels like a waste -- especially when you won't get kicked out of your house for a long, long time.
  • Millions of credit card holders are seeing their credit availability slashed -- meaning that they can't use credit cards to cover living expenses while pouring cash into their mortgages.
And working against this tidal wave is President Obama's mortgage modification plan which, however well-intentioned, has only helped a tiny fraction of eligible borrowers.
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