The subprime to prime mortgage handoff
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.