There’s a simple reason you shouldn’t get too excited about the “recovery signs” of an economic turn around in the housing market. Many of the prime mortgages are becoming sub-prime as a new wave of foreclosures begins to hit. Mainstream homeowners — those previously “safe” borrowers with sound credit who have conservative fixed rate mortgages are getting into trouble at an alarming rate. In the third quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%. For the first time in the housing crisis, these homeowners accounted for the largest share of new foreclosures.
Job losses are a major reason once-safe borrowers are falling into trouble. With unemployment likely to rise, the problem will only get worse. So the core challenge at the heart of our economic crunch — a poor housing market that infects banks and the whole credit system — is not going away soon. That’s bad news for the stock market and the economy in general. “A couple of months ago, a lot of people had hoped that the housing collapse was about over,” says money manager and forecaster Gary Shilling, a well-known bear who called the housing problems early in the cycle. “But it was more hope than reality.”
Economists call rising delinquencies and foreclosures among prime borrowers the third wave of trouble. The first two waves were housing speculators going bust and sub-prime borrowers — those with poor credit histories and some version of no-down adjustable rate mortgages getting into trouble. Mark Zandi, the chief economist for Moody’s Economy.com, calls the third wave a “significant threat” to the economy. ”It is gathering momentum,” he says. “The problem is now well beyond sub-prime and deep into prime.” It will cause at least three problems that could dampen the “recover signs“:
***Mounting foreclosures among prime borrowers will destroy their credit ratings, making it tough for them to contribute to growth by spending on credit.
***Rising foreclosures will add to an already high level of housing inventory on the market, pushing down home prices even more. That will make people feel poorer, so they’ll spend less. It also will tempt more people to walk away from mortgages, adding to the problem.
***Foreclosures will mean more loan losses at banks, deepening the problems in the financial system.
Zandi suspects many so-called prime borrowers are now going bust because, well, they really weren’t so prime to begin with. The same lax standards that created a zoo-like atmosphere in sub-prime lending infected prime mortgage lending to some degree. Many prime borrowers still stretched to qualify, and they lack the financial reserves to sustain any personal setbacks, Zandi says. A few months of unemployment will throw them into default. The official unemployment rate hovered around 10% in October, and many economists believe it will only increase as the recession drags on.
Tags: adjustable rate mortgages, bad credit mortgage, home mortgage, mortgage, mortgage crisis, mortgage lender, mortgage loan, mortgage rate, prime borrower, prime mortgage, refinance mortgage, subprime mortgages
