Real Estate & Mortgage Insights

Foreclosure Crisis Spreads to Good Credit Homeowners

The current recession has finally pushed even homeowners with good credit ratings to start filing in droves for foreclosure. What started with mass defaults of subprime, or poor credit loans, has now spread in the form of general economic downturn to those who actually took on mortgage debt sensibly.

According to the latest Mortgage Bankers Association National Delinquency Survey released Thursday, a record 9.12 percent of all homeowners were behind on their mortgage payments in the first quarter of 2009, an increase of 2.77 percent from last year and an all-time record high. The total percentage of mortgages already in foreclosure during the first three months of the year grew to 3.85 percent, also a record high.

It is no surprise that a significant portion of these mortgages are those of subprime borrowers with risky adjustable rate mortgages (ARMs). In fact, almost half of all such poor credit loans are in default or foreclosure, confirming that it was never a good idea to start lending willy-nilly to those who hadn't been able to keep up with their financial obligations in the past.

What was a surprise, however, is that prime or good credit borrower loans are now rapidly entering foreclosure territory.

"In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures," said MBA chief economist Jim Brinkmann.

"What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans. The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures. In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans. More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults."

The MBA report found that almost 6 percent of all prime borrowers with fixed rate loans are now in foreclosure or behind on their payments. The subprime crisis of 2006 that led to the broader financial market crisis has now left many generally fiscally responsible people jobless and without means to keep up with their loan payments. The number of people filing for unemployment benefits has dropped in each of the past two weeks, but the overall unemployment rate in the U.S. has risen to 8.9 percent, with 13.7 million Americans out of work as of April, according to government figures.

Are we likely to see an end to these good credit delinquencies anytime soon? Well, if you consider the end of next year soon, then yes. Brinkmann made it clear he thinks the broader economy will have to stabilize first.

"MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that," said Brinkmann.



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