Mortgage-paying problems spreading

Credit-worthy borrowers not immune

By David M. Dickson (Contact) | Saturday, September 6, 2008

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The housing foreclosure and delinquency crisis, which erupted last year as subprime borrowers with adjustable-rate mortgages began to default at record levels, has now begun to hit morecredit-worthy homeowners to an extent not seen before, according a quarterly report issued Friday by the Mortgage Bankers Association (MBA).

Moreover, the "seriously delinquent" problems among both prime and subprime borrowers have reached their highest levels in many presidential battleground states, including Ohio, Florida, Nevada and Michigan.

The MBA considers a borrower to be "seriously delinquent" if the home is in foreclosure or if a mortgage payment is past due by 90 days or more.

Prime borrowers are the most credit-worthy customers seeking mortgages based on several risk factors, including income level, employment status, size of the down payment and credit history.

Among prime borrowers with fixed-rate mortgages, the percentage of seriously delinquent borrowers has nearly doubled during the past year, rising from 0.67 percent during the second quarter of 2007 to 1.3 percent during this year's April-June period.

"That's a big number compared to a year ago, especially because prime-fixed is where most of the loans are," said Patrick Newport, an economist at Global Insight. Prime fixed-rate loans "have been considered to be very safe."

At the end of last quarter, 6.78 percent of prime borrowers with adjustable-rate mortgages (ARMs) were seriously delinquent. That was nearly 3.5 times the year-earlier rate (2.02 percent) and more than 10 times the rate (0.63 percent) in the second quarter of 2005, a year before housing prices peaked. MBA's database of 45 million mortgages includes more prime ARM loans (6.1 million) than the combined number of subprime fixed and ARM loans (5.3 million).

During the first half of this decade, as housing prices skyrocketed in many markets, especially in California and Florida, many prime borrowers took out adjustable-rate mortgages, whose initial interest rates, or "teaser" rates, were lower than the rates for fixed-rate mortgages.

Since housing prices were soaring, many prime ARM borrowers assumed they could always refinance their loans when the "teaser" rate was scheduled to adjust upward. However, as housing prices collapsed during the past two years in many markets, especially in California and Florida, many prime ARM borrowers were no longer able to refinance because they no longer had any equity in their homes.

The quality of prime ARM loans will likely continue to deteriorate. During the second quarter, "the increase in prime ARM foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans," said Jay Brinkmann, MBA's chief economist. "Thus the foreclosure-start numbers will likely be increasingly dominated by prime ARM loans."

Embattled mortgage-financing giants Fannie Mae and Freddie Mac, which hold or guarantee about $5 trillion in prime mortgages, "did not assume that the delinquency and foreclosure rates for prime loans would be this high," Mr. Newport said. "Fannie Mae and Freddie Mac will therefore likely have bigger problems down the road."

In addition to the mounting problems in the prime mortgage market, MBA's second-quarter report revealed that the total delinquency rate continues to be the highest ever recorded in its survey; the rate of foreclosure starts and the percentage of loans in the process of foreclosure also reached record levels; and the seriously delinquent rate reached 17.9 percent for all subprime loans and 26.8 percent for subprime ARM loans.

Throughout the United States, the MBA report classifies 2.35 percent of prime loans and 17.85 percent of subprime loans as seriously delinquent. In several battleground states, those respective percentages are: Ohio (2.95 and 20.29); Florida (5.02 and 26.28); Michigan (3.10 and 21.15); and Nevada (4.30 and 23.46).

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