The subprime to prime mortgage handoff

August 20, 2009

Data released by the Mortgage Bankers Association confirms the trend that prime borrowers are the ones to worry about.

While the percentage of mortgages entering the foreclosure process in the 2Q held relatively steady at 1.36%, the change in composition is noteworthy.

From the MBA press release:

While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans.  The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.  A year ago they accounted for one in five.

Another interesting bit for taxpayers – there’s been a big jump in FHA foreclosures, currently at 1.15% percent. The FHA is essentially a government mortgage insurance agency so foreclosures. While the FHA brags on its website that it’s self-funded, if the losses become too much, it’s safe to assume in the current environment that the government would extend a helping a hand.

Also, it’s the FHA that essentially took on subprime lending last month when it agreed to give mortgages with negative equity in their homes. In July, it loosened its criteria so homeowners significantly underwater could refinance into an FHA loan. These borrowers can now borrow 125% of their home’s worth, up from 105%.

UPDATE: MBA just got back to me about what’s included in their prime category and it looks like Alt-A loans are mostly categorized as prime by those banks participating in the survey. That could be skewing things since Alt-A loans by definition are less than prime and extremely loose lending standards during the boom have made them look more like subprime loans. For example, borrowers taking out an Alt-A loan could state their income rather than prove it.


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What a mess! From all the solutions I see adopted, they are merely kicking the can further down the road. I shudder to think what the re-default rate will be on the loan modifications. The banks prayers were answered with the FASB rule changes.

Right now FNM, FRE & FHA are the only game in town relating to lending – all government backed. You should also do a piece on the FHLB wholesale banks (again government guaranteed) as the commercial banks are heavily reliant on them.

Posted by Mark G | Report as abusive

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I do not understand the crying, they were stupid enough to buy the places for insance prices, now man up and pay the piper, end of story. Does it make sense to refinance a loan that they will never pay off? On a house that is consistantly and rightfully falling in price? Well, does it make any sense at all to have say for example a 700K loan over your head on a house worth 200K? Of course NOT but it never made sense to pay 700K (or lend it for that matter)on a place rightfully worth 200K in the first place, so again to all those who thought they were ‘rich’ – MAN UP to your actions.

Posted by Jack | Report as abusive

Calm down, would you? You sound like Rumpelstiltskin after the queen has told him she knows his name.

You are so eager to bring down millions of your fellow Americans who thought they were doing the right thing for themselves and their families. I am sure you will enjoy living through the Great Depression II.

Maybe there is no way to prevent this catastrophe from happening, but people like you are making it harder for any solution to be implemented. Oh, and your karma is looking pretty bad too.

Posted by Oggi | Report as abusive

Jack is right, everyone is responsible for their own actions no matter how stupid they are.

Posted by Dion | Report as abusive

Jack is totally right! “Bring down millions of fellow americans” I’m sorry – they are the ones who caused this fiasco. You can not afford a 700k house if you are bringing in 150k in salary with a less than substantial down payment. By paying for that house…they inflated prices and now that reality hit – tough sh#t. Im SO OVER STUPID FELLOW AMERICANS…we lost our moral compass. these people are not where money should be thrown- they need to go to schools to educate – lets start with early ed for micro and macro 101 economics.

Posted by Lori | Report as abusive

Jack is a bit angry but correct. This “catastrophe” is a simple lesson in macroeconomics. Falling prices is the solution, not the problem.

Posted by Jenny J | Report as abusive

The taxpayer is bailing out the banks and Wall Street. Goldman Sachs got 13 billion of our working American taxpayer’s money so Goldman Sachs could buy A.I.G. at a
fire sale..The banks didn’t have to “man up–and pay the piper” -uck you don’t know what your talking about. Senator Grassley has a federally tax paid affordable Health plan that the poor American -uck him too…hypocrite politician…as our American manufaturing jobs are shipped overseas as the Middle class are letting their rights get trampled on by corporate owned politicians who don’t care about us.I WANT AFFORDABLE HEALTH CARE….I DON’T WANT TO BAIL OUT GANGSTER SHEISTERS ON WALL STREET..I WANT A MIDDLE ClASS IN THIS COUNTRY.. and we are going to get it…the sh-t is going to hit the fan…there is a lot of anger at there directed at Wall Street and our so-called representatives…

Posted by martin | Report as abusive

It seems to me the firt post was right. We are simply kicking the can down the road hoping that some miracle will happen. Well outside of everyone having massive increases in salaries the housing market will keep slumping for a long time.
The worst part is we keep shearing in the news and by liar real estate agents that we have hit bottom and it is time to buy in before it goes up again.
In depressed areas this means you will buy into a house that will not increase in value for decades and in higher end neighborhoods it means you are going to buy to high and be upside in about two years. It is classic dead cat bounce going on right now.

Posted by Don | Report as abusive

Jack is pretty disrespectful and needlessly contentious. Still, if his point is that folks in or nearing foreclosure should expect nothing from the taxpayers, I agree. Foreclosure isn’t the end of the world and there is no reason to dig into our collective pocket to subsidize housing expenses for these people. Foreclosures maybe can be viewed as coming in three flavors: speculative purchases gone bad, strategic defaults to dump a depreciating asset and loss of income defaults. The last one sounds as if we should be sympathetic – and I am – but they are very susceptible to re-default. The taxpayers did subsidize very,very heavily the terrible decisions of many banks and other financial institutions. But we elected Presidents Bush and Obama and the every Congressperson that approved these expenditures. I wish they hadn’t, but spreading billions more to bailout defaulting “homeowners” doesn’t logically follow at all from this.

Posted by Eric | Report as abusive

The West is about to collapse. And it couldn’t happen soon enough. SPECIAL RIGHTS FOR NO ONE!

Posted by Kevin | Report as abusive

I imagine worse is yet to come and any talk of silver linings is ridiculous. Many of those people w/ prime, alt A’s or otherwise will also stop paying their mortgages when they realize they will never see any return on their “investment”. The banks are holding a lot of repossessed properties off the market to avoid flooding it (and driving prices down further). Additionally, they are not serving as many foreclosure notices as they will become liable for property taxes and maintenance after the “owners” leave. The silver lining people are talking about is based on 4 factors. 1) Low interest rates 2) Gov’t incentives 3) Seasonal high demand 4) “bargain” home prices. I just wonder when those people buying now realize they are also loosing money on their property….and will do so until prices become back to historical norms IE 3 X salary! Wake up people!!

Posted by phil | Report as abusive

Anyone here have kids starting families? The longer these absurd housing prices remain – the more damage they\’ll do to young families.

So before you start throwing rocks at a real housing collapse, think about what you\’re propping up/defending.

I say let\’s get on with it. Every system needs cleaning out from time to time, and \”kick the can\” just compounds the damage. The natural equilibrium price of housing *nationwide* is between $70-$80 sq ft. When the bubble finally is allowed to burst, we may see $10/sq ft for a time.

And yes, I\’ll lose everything built up over 30+ years. It\’ll be worth it.

Posted by WD | Report as abusive

It seems to me like Jack is aiming his venom at people who overpaid and then walked away from their house/debt jail. I understand that he thinks that this is wrong but it is not a moral decision, it is business. I would have no hard feelings towards each person who makes that decision as long as it would not cost the taxpayers any money. I don’t think that they have any obligation to the banks other than to abide by the terms of the contract…and sacrificing the home in exchange for non-payment is a clearly defined possibility in each and every mortgage contract. However, since the govt is bailing out the banks when individuals default it does cost us tax dollars. This is why I can understand someone like Jack being so upset about a business decision which really should not affect anyone other than the person who loses the home and the institution who lent the money. Why did these transactions ever grow to affect anyone other than these two parties? That is a mystery to me and it just doesn’t make any reasonable sense.

Posted by John | Report as abusive

Amen John. It’s business between the house buyer and the lender. When it all came down last fall both parties should have failed. The connected crony lenders have been bailed out at our expense. Never should have happened. Now most of the crooks are still in place. That’s the opposite of capatilism. Now we’ll be years suffering through this outrage.

Posted by Jerry | Report as abusive

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