Good Borrowers Gone Bad: The Latest Wave of Defaultsby Tim Manni
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?