Friday, August 21, 2009

Prime Loan Delinquencies Mounting

According to the MBA's latest survey, 13.2% of mortgages on homes with one to four units were at least a month overdue or in the foreclosure process in the April-June period, up from 12.1% in the first quarter and 9% a year earlier. While foreclosure starts have slowed on subprime mortgages, they have picked up on prime loans. Among prime loans 9% were past due or in foreclosure at the end of June, up from 5.35% one year ago. For subprime loans, the rate was 39.5% compared with 30% last year. Prime loans, however, accounted for 58% of foreclosure starts, up from 44% last year, while subprime accounted for 33% of foreclosures down from 49%.

The spike in foreclosures that began two years ago in the subprime market was triggered by a halt in rising home prices. Once subprime borrowers couldn't use their magical equity that the bubble created out of thin air to refi into a better loan, they could no longer avoid the painful resets on their mortgage rates. So they began defaulting in droves. This led to more downward pressure on home prices as foreclosures starting hitting the market and adding to the growing supply of houses for sale. Problems in the subprime market have now spilled over into the prime market as the economy has taken a turn for the worse. Prime borrowers are defaulting now for more traditional reasons, such as the crappy economy. They can't refinance or sell their house because they are upside down on their mortgages. While subprime defaults may be peaking (although this too might be temporary due to various moratoriums), prime defaults are just beginning to pick up steam. Way more pain ahead on the housing front.

Here's the chart from the WSJ article:

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