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June 9th, 2009

Good Borrowers Gone Bad: The Latest Wave of Defaults

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Part of our business involves forecasting the future. After subprime and low-doc loans burst the housing bubble over a year ago, lenders, brokers, lawmakers, industry officials, and borrowers were determined not to make those same mistakes twice. Yet if you are familiar with the history of the mortgage industry than you know the same mistakes are bound to happen twice — they’re just disguised a little differently.

Despite being on the cusp of recovery, we are already witnessing a new wave of defaults that can stall our rebound. The cause behind at least a portion of today’s defaults is much different than a few years ago: the culprits are “good borrowers gone bad.” So called “prime” mortgage loans are turning sour at a devastating pace. The Federal Housing Finance Committee (FHFA) reported to Congress that “Two-thirds of the AAA-rated private-label [mortgage-backed securities] purchased by Fannie Mae and Freddie Mae have been downgraded to “junk”…and only a small portion is still rated AAA.”

From USA Today:

In the first quarter, almost half of the overall increase in the start of foreclosures was due to the increase in prime, fixed-rate loans, according to the Mortgage Bankers Association (MBA). At the end of the fourth quarter, 2.4% of prime mortgages were seriously delinquent, more than double the 1.1% at the end of March 2008, according to a report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The factors that have contributed to the increasing number of “junk” loans are far different today than what we’ve seen the last time around. Instead of unclear or deceptive loan terms, or loans made to weak borrowers, the new batch are being fostered by widespread unemployment, lower credit scores, and falling home prices. What makes this scenario even more worrisome is that trends like employment, rising home values, and improving credit scores all signal economic stability as well as recovery, and we still have little, if any, improvement in those downhill trends.

What does the future hold? While the Obama Administration has already implemented low-cost refinancing to help “responsible” borrowers avoid foreclosure, the strategy is proving ineffective. Nearly all of the recent strategies aimed at correcting the housing market have vastly under-performed, and those once considered “prime” borrowers are falling behind on their mortgages faster and faster. How can the country quickly produce a recovery in housing when factors like unemployment, falling home values, and weak credit scores are casting so much drag?

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3 Responses to “Good Borrowers Gone Bad: The Latest Wave of Defaults”

  1. Alessandro Machi Says: June 11th, 2009 at 12:50 am

    It would be nice if the media would expose the direct correlation between rising credit card interest rates and the rising default rates.

    It would also be interesting if somebody besides myself could report about what appears to be the credit card companies defaulting customers rather than trying to help them because it is safer and more profitable to do so.

    http://www.Daily-Protest.com

  2. Tim Manni Says: June 11th, 2009 at 12:59 pm

    Alessandro,

    I don’t think the “media would expose the direct correlation between rising credit card interest rates and the rising default rates” because it doesn’t have much to do with the housing crisis (the topic of this post).

    Yet, numerous media sources have noted the correlation between higher credit card default rates and rising interest rates, larger monthly minimum payments, smaller credit lines, etc.

    “It would also be interesting…”: If you’re not familiar with the recent passage of the new credit card laws and reform, they’re designed to eliminate deceptive money-making practices by the credit card companies. I think everyone is at least partially familiar with the fortunes credit card companies make on late fees, penalties, and other charges — it’s no secret. Unfortunately, this new credit card reform is going to shift the card companies’ money-making bull’s eye from problem borrowers to customers like myself who only charge what they can afford and pay their bill off in full every month. Other experts say the reform will make credit conditions even tighter.

    Thanks for commenting,
    Tim

  3. Mortgage Market, Filled with Confusing Signals — Morning Mortgage Notes Says: July 7th, 2010 at 6:25 am

    [...] Good Borrowers Gone Bad: The Latest Wave of Defaults (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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