May 8, 2008
By: Stephanie Armour
The first concrete evidence that delinquencies on mortgage bills have spread well beyond those with subpar credit shows that even prime borrowers have increasingly fallen behind on their house payments.
The figures remain relatively small so far. But if they rise further, delinquencies on prime loans — given only to those with good credit — could prolong the housing crisis.
About 2.3% of prime loans were 60 days' past due in February, the highest level in at least a decade, according to data from FirstAmerican CoreLogic LoanPerformance. That's up from 1.4% a year ago.
Some economists, such as Brian Bethune of Global Insight and Dean Baker of the Center for Economic and Policy Research, say they think delinquencies on prime loans have likely risen further since then.
We're seeing the prime area coming under pressure, with delinquencies moving up," Bethune says. "We're in uncharted territory, and it's definitely been affecting the prime market, although it's still not anywhere as severe as in the subprime market."
Still, even among prime borrowers, not just delinquencies but also foreclosures are up. From the fourth quarter of 2006 to the fourth quarter of 2007, the rate of foreclosure filings for prime adjustable-rate mortgages rose from 0.41% to 1.06%, the Mortgage Bankers Association says. The rate of foreclosure filings for prime fixed loans rose from 0.16% to 0.22%. Prime ARMs represent 15% of loans outstanding and 20% of foreclosure filings.
Reasons why mortgage woes are hitting prime borrowers:
•Job losses. In areas especially hard hit by the economic slowdown, including Michigan and Ohio, job losses are battering even homeowners who hold prime loans that qualify to be bought by Fannie Mae and Freddie Mac. The sudden change in financial security has left more prime-loan holders unable to make their mortgage payments on time, raising delinquencies. Many economists don't expect job growth to really pick up before 2009.
•Rising payments The Federal Reserve's interest-rate-cutting campaign has helped minimize the higher costs that can arise once ARMs reset. Still, many prime borrowers with ARMs are seeing rate increases, which make it harder to make payments.
Jeremy Brandt, CEO of 1-800-CashOffer, says "a high number of people who call us to sell their home are behind in payments and are not subprime borrowers. The typical situation is a person with great credit that bought a big house way over their means using an ARM or interest-only loan."
•Falling home prices. As house prices collapse, especially in states such as California and Arizona, some people with prime loans are finding they owe more than their homes are worth. Many are walking away or delaying payments while they decide what to do.