Families Fall Behind on their Mortgage. What’s next?

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In our last post, we discussed the possible impact distressed properties might have on the values of homes in the surrounding area. We documented how the current economy has devastated the finances of so many families in every income bracket and in almost every neighborhood in this country.

In order to bring some insight to the issue, we must realize that more and more families are falling behind on their mortgage payments.

When families fall behind, there are only four possible outcomes:

1. They ‘self cure’ meaning they themselves find a way to catch up on the payments.
2. They receive a loan modification from the bank.
3. The house goes to foreclosure.
4. The bank agrees to a ‘short sale’ where the bank agrees to accept a selling price which is less than the amount currently owed on the mortgage.

The effect on neighborhood home values will be determined by which path is taken. Obviously, the first two scenarios allow the homeowner to stay in the home; therefore, there will be no negative impact since there is no sale of the property.

In the last two scenarios, the home will be sold. Studies by the Center for Responsible Lending show that if a home sells at a foreclosure the neighboring home values are dramatically impacted. In the case of a ‘short sale’ the impact will not be as great since the home never becomes vacant.

So, if we know there are different results based on what happens with the house, let’s look at the possibility of each of the four possible outcomes.

In today’s post, we will talk about the possibility of the homeowners catching up on their own, known as the ‘cure rate’. In the past people would take a second job or borrow money from family to catch up. Today, many people can’t even find a first job and few families still have the savings to help.

Below, is a graph showing the cure rates on mortgages 30, 60 and 90 days behind in 2005 and the cure rates today:

Let’s only consider those mortgages that are already 90 days+ behind. Once a home falls ninety days behind, there is less than a 1% chance the homeowner will catch up without outside help. If we calculate the number of homes currently 90 days behind based on numbers from the Mortgage Bankers Association, we get over two million homes. Ninety nine percent of them will fall into the modification, foreclosure or short sale category.

If the mortgages are not modified, they will become a distressed sale and impact house values in the neighborhoods surrounding them.

What are the chances these homeowners will receive a loan modification?

We’ll cover that in the blog tomorrow.

Tagged as: Cure Rate, Mortgage Payment, Short Sales & Foreclosures