Subprime good, prime bad

By Edward Harrison On Oct 27, 2008

The latest trend in the U.S. housing market is the move of problem loans from the subprime category and into Alt-A and prime mortgages. We have been sounding the alarm bells on this since about June. See the related posts below. However, now it seems we have reached that critical state where subprime is relatively good and prime is bad and getting worse.

Housing Wire is one site that is on top of these events and has a telling post today on this building dichotomy between prime and subprime:

Let’s start with the good news, because there is some to be had: during the third quarter, the number of subprime foreclosure sales actually looks to have fallen relative to Q2’s totals. Better yet, the HOPE NOW coalition reported Monday that it set a monthly record in September relative to the total number of loan workouts, exceeding 200,000 for the first time since the coalition began compiling data in July 2007.

But HOPE NOW’s data also paints a bleak picture of an increasingly troubled group of prime mortgage borrowers relative to subprime — underscoring the problems now emerging in the Alt-A and option ARM mortgage sectors. In fact, while subprime foreclosures actually fell 3 percent quarter over quarter, according to HOPE NOW, prime foreclosures jumped by more than 20 percent in the same time period, and are now almost 150 percent of year-ago totals.

It gets worse: prime borrowers are far less likely to receive a loan modification, as well, should they get find themselves in trouble. Instead, servicers are much more likely to put a troubled prime borrower into a repayment plan — often seen by those in the industry as a band-aid that merely covers a future default. For every prime borrower given a loan modification, 2.5 more were put into a repayment plan during the third quarter; in stark contrast, every subprime loan modification generated less than one repayment plan (0.83, to be exact).

The fact the prime borrowers are now facing mortgage distress is one that is largely missed by most consumer groups and community lobbyists, one source told HW.

“It’s not politically correct to say, but the fact is that it’s much easier to sell help for subprime than it is for prime borrowers,” said one source, a Capitol Hill lobbyist that asked not to be named in this story. “Prime borrowers are supposed to know better.”

Just like their subprime counterparts, however, many prime borrowers decided during the housing boom they needed to get into a home at any cost, and used increasingly risky loan products to do it; so rather than being largely whacked by mushrooming interest rates, as their subprime counterparts have been, these borrowers are now seeing loans recapitalize or reach levels they simply never could afford.

Many borrowers lied on their loan applications regarding their jobs and their income levels, as well, according to Interthinx, Inc. a risk and compliance solutions provider to the mortgage industry.

Please read the rest of the post at Housing Wire. The long and short here is that there are a lot of losses coming in the prime and Alt-A categories of mortgages in the United States. The good news is that with subprime less of an issue, we should see a visible slowing in the rate of house price falls. I happen to think we have seen more than 50% of the decline in house prices already.

But, while the subprime crisis has past its peak, the crisis in prime mortgages is just starting to heat up. And it will certainly be ugly – foreclosures, writedowns, bankruptcies, bailouts. You have been forewarned.

Source
Subprime, Prime Mortgage Woes Diverge During Q3 – Housing Wire