37 Months of Increasing Prime Mortgage Delinquencies

This article originally appeared on the Irvine Housing Blog.

Prime mortgages are defaulting at ever-increasing rates. The problem with mortgage delinquency is not improving.

Cars are crashin’ every night
I drink n’drive everything’s in sight
I make the fire
But I miss the firefight
I hit the bull’s eye every night

It’s so easy, easy

Guns N’ Roses — It’s So Easy

It is rare to find a great deal of consistency in financial data. There are always statistical blips where some indicator moves against the prevailing trend, and reporters are keen to report on any insignificant change as if it is a new trend. For the last 3 years, the news on mortgage delinquencies has been very consistent — consistently bad. This is one indicator that hasn’t yet provided the slightest glimmer of hope to those waiting for the housing rebound.

Seriously Delinquent Prime RMBS Rise for 37th Straight Month: Fitch Ratings

Diana Golobay — Tuesday, July 13th, 2010, 11:22 am

The 60-plus-day delinquency rate for US prime residential mortgage-backed securities (RMBS) rose in the 37th consecutive month in June, according to Fitch Ratings.

The credit-rating agency noted the “seriously” delinquent rate — of 60 days or more — within prime jumbo RMBS rose to 10.4% in June, up from 10.3% in May and 6.4% at the same time last year.

What is even worse is that once borrowers go “seriously” delinquent, the cure rate has been getting steadily worse.

Think about what we have going on. We have a very large number of borrowers who purchased at the peak and can’t afford the home with conventional financing even at very low interest rates. People simply can’t pay off a loan that is six-times their yearly income no matter how favorable the interest rate. Add to all these peak buyers the HELOC abusers and other peak refinancers, and you have a recipe for enormous debt that will never get repaid. Once these struggling loan owners stop paying, they enter the abyss never to return.

The five states with the highest volume of prime RMBS loans outstanding — California, New York, Florida, Virginia and New Jersey — represent a combined two-thirds of the estimated $354bn market, Fitch said. Prime jumbo RMBS delinquencies of 60 days or more rose in all but one of these top volume states:

The rate of loans rolling into later stages of delinquency within prime RMBS remained above 1% in June after a dip months earlier, but is still below the record high 1.4% recorded in March.

“The persistently high roll rates indicate that the delinquency declines are more a reflection of increased property liquidation and ongoing loan modification activity than of widespread improvement in mortgage payment performance,” said Fitch managing director Vincent Barberio, in a statement, adding that “Prime RMBS has yet to show any signs of a favorable turnaround.”

Almost nobody cures their debt by bringing payments current. This used to happen before the bubble, but with the huge debt loads, negative equity positions, and high unemployment, very few borrowers come up with the cash to cure their loans. The next best alternative is to get a loan modification and add the missed payments to the loan balance. Many in our government thought this solution might actually work. It won’t because the debt load is far to large, and with negative equity, many borrowers don’t see the point. This leaves liquidation through short sale or foreclosure as the ultimate solution. The loan is “cured” because it no longer exists.

Despite improvements in subprime and Alt-A RMBS delinquencies, roll rates remain elevated in those loan types, too.

Subprime RMBS delinquencies fell again in June to 43.7% from 44.8% in the previous month. The subprime RMBS roll rate fell slightly to 4.2% from 4.3% a month earlier.

Alt-A RMBS delinquencies slipped to 3.7% in June from 33.9% in May, marking the third monthly decline since April 2006. Roll rates rose to 3.4% in June from 3.1% in May.

Many of the loans in Irvine are packaged into prime residential mortgage-backed securities. We are not subprime dominated, so despite the high delinquency rates, lenders have not foreclosed on delinquent borrowers here. Orange County has high delinquency rates, and the steady increase in defaults on prime mortgages has not missed Irvine. Each day I profile a property that was likely a prime mortgage gone bad. With the sky-high prices we had here (and still have) the level of mortgage distress is high as well. Perhaps the lender’s gambit of allowing borrowers to squat will succeed, and Irvine will not see further price declines. Anything is possible, but I rather doubt it.