NEW YORK--(BUSINESS WIRE)--Recent U.S. home price growth has been insufficient to help borrowers still struggling to pay their mortgages, according to Fitch Ratings. Evidence of this is in the growing percentage of borrowers entering foreclosure with positive equity in their homes.
Fitch estimates that the percentage of borrowers entering foreclosure with positive equity has roughly doubled in the last two years. While equity continues to be an important factor for borrower payment behavior, income and ability to pay are key drivers as well.
It is clear that rising home prices have had a positive influence on borrower behavior. However, some portion of borrowers still exhibit an inability to recover as the economy has moderately improved. This seems particularly evident in many of the RMBS loans that have been entering into the foreclosure process over the past few years. In many cases, troubled borrowers with equity are unable to sell their properties because the proceeds of the sale would not be enough to cover the mortgage amount, the closing costs, and the backlog of missed payments. Loans entering foreclosure today have missed roughly two years of payments on average, more than double the pre-crisis, long term average.
The changing composition of borrowers entering foreclosure may also help explain why those with positive equity continue to struggle. The percentage of loans entering foreclosure which had been cash-out refinances at origination increased steadily since 2008, and now accounts for 50% of the total. Today's tighter loan underwriting and origination guidelines may prevent many of these borrowers from tapping the equity in their homes to cover expenses. Although equity may exist, the current guidelines are in most cases restrictive for borrowers with poor credit history. Also, the loan-to-value and cash-out dollar limits are significantly lower than what was available during peak-vintage years and, despite the improved equity situation, few of these delinquent borrowers could materially benefit from further cash-out refinancings.
Furthermore, approximately half of all loans that recently entered foreclosure had been unsuccessful in at least one prior loan modification. The percentage of loans entering foreclosure that had been underwritten to subprime guidelines has increased as well. Such attributes suggest that many of these borrowers were either overleveraged at origination or had payment challenges in prior years and have few alternatives now and may be able to remain in the home until the foreclosure process is complete.
The age of loans entering foreclosure also continues to climb steadily. Borrowers recently entering foreclosure have loans that are roughly eight years seasoned on average, compared to the pre-crisis average of two-to-three years. As such, loans with positive equity that are entering foreclosure today may be more adversely selected due to the length of time prior to entering foreclosure and the potential for disrepair.
It is possible that some portion of borrowers currently in the foreclosure process obtained additional and/or secondary financing subsequent to the origination of their first liens. The additional leverage could also be a factor in their ability/willingness to pay and whether the borrower is in a positive equity position. These factors are important considerations for the mortgage loan servicers, who must determine the best resolution for the borrower and property, while assessing the ultimate impact on investors.
Under the existing regulatory framework, residential mortgage servicers have many tools at their disposal to help struggling homeowners. However, servicers are often left with few options other than foreclosure for borrowers who are unable to make regularly scheduled mortgage payments, despite their interest in remaining in their homes. This is especially true in situations where borrowers have equity in the property and have payment problems even after loan modifications involving significant rate reductions.
Additional information is available at 'www.fitchratings.com'.