Recession Pushing Even Credit-Worthy Borrowers Over the Edge

For some time, bankers have been struggling with rising delinquencies on exotic mortgage products made to borrowers with checkered credit histories. But now—as the recession continues to erode the labor market—a growing number of borrowers with solid credit histories are falling behind on their mortgages as well, which is pushing foreclosure and delinquency rates to alarming levels.

The Mortgage Bankers Association’s most recent National Delinquency Survey, released Thursday, included sobering figures. The seasonally adjusted delinquency rate for mortgages was 9.12 percent of all loans at the end of the first quarter, an increase of 2.77 percentage points from a year earlier and an all-time high. At the same time, 3.85 percent of all mortgages were in the foreclosure process, which is a 1.38 percentage point jump from the same period in the previous year. “Both the foreclosure inventory percentage and the quarter- to- quarter increase are record highs,” according to the MBA report.

From the MBA:

“The Mortgage Bankers Association’s first- quarter mortgage delinquency report was the worst of the housing recession so far and offers little room for optimism about the house price outlook,” economists at Nomura wrote in a report.

But what’s particularly troubling is just where these problems are coming from. Check out what Jay Brinkmann, MBA’s chief economist, had to say about the figures in a statement included in the news release:

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.

In essence, the report shows that the recession—and the higher job losses that have come with it—is playing an increasingly profound role in the rise of mortgage delinquencies and foreclosures. “Long ago, I predicted that the mortgage delinquency and foreclosure problems would migrate up the mortgage food chain—from subprime to Alt-A to prime,” Mike Larson of Weiss Research said in a report. “There is abundant evidence that this process is underway. Indeed, the delinquency rate on “cream of the crop” loans...prime fixed rate mortgages...has more than doubled in the past two years to a record-high 4.68 percent.”

Given this dynamic, it will be tough for mortgage delinquencies rates to come back to earth until companies start hiring again. And when can we expect that to occur? “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,” Brinkmann said. “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.”

From the MBA: