Prime Mortgage Defaults Surpass Subprime
According to the latest Hope Now statistics, prime mortgage defaults outnumber subprime mortgage defaults.
I had noticed that the number of people I’m working with who “had good credit before I got into this mess,” was rising. Also, I’m seeing quite a bit more homeowners who are trying to avoid foreclosure on Fannie and Freddie Mac loans. However, the number of homeowners that I’m seeing who have adjustable rate mortgages and sub-prime interest rates still outnumber the prime borrowers facing foreclosure by a significant margin.
This trend is disturbing for a number of reasons.
1- This shows that we can’t just blame “predatory loans” for the increase in foreclosure filings.
2- The assumption is that homeowners with prime loans are fiscally more responsible. If even these borrowers are now trying to stop foreclosure, this demonstrates even more economic weakness than we’ve previously seen.
3- The options available for prime borrowers to prevent foreclosure are significantly less attractive than those offered to homeowners who have sub-prime loans.
It’s a fairly simple, logical and straightforward process to take a sub-prime borrower from an adjustable-rate mortgage, currently at 13%, with a 7% start rate back down to the teaser rate. There’s a clear benefit to both the lender and the homeowner, and this creates a significant difference in the affordability of the loan.
On the other hand, if you have a homeowner trying to avoid forelosure who has a FNMA loan at 6.5% and doesn’t have the ability to make that monthly payment, what do you do with it? There’s no downside room there.
Fannie Mae and Freddie Mac aren’t really big on taking those low interest rates even lower. Perhaps Sheila Bair’s model will take hold with the GSE loans, but there are significant problems with that approach, as well.
FNMA and FHLMC haven’t faced nearly as much foreclosure activity as the sub-prime mortgage investors. While I have heard that Fannie and Freddie are desperately seeking short sales to lighten their foreclosure reporting, they’re not so desperate to cut their interest rates in half… yet.
I suspect that with another 12 months of pain, they’ll finally come around to the idea that perhaps it makes better sense to offer loan modifications to avoid foreclosure. At some point, the loss severity levels will justify a 50% reduction in interest rate to stop foreclosure.
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