Prime Problems

The myth that the housing problems were contained in the sub-prime mortgages is being busted. The problems are alot deeper depending on the foreclosure spiral could get much, much worse. Both prime and sub-prime laons were made using liar loans. Meanwhile those wonderful Option ARMs (AKA suicide loans) were made to people with high credit scores. This USA Today article evaluates how the mortgage crisis has hit prime loans. Prime mortgage delinquencies are already increasing, with even higher increases expected. Things are expected to deteriorate before improving. The article sites three reasons why prime mortgages are in trouble -

•Job losses. In areas especially hard hit by the economic slowdown, including Michigan and Ohio, job losses are battering even homeowners who hold prime loans that qualify to be bought by Fannie Mae and Freddie Mac. The sudden change in financial security has left more prime-loan holders unable to make their mortgage payments on time, raising delinquencies. Many economists don't expect job growth to really pick up before 2009.

•Rising payments The Federal Reserve's interest-rate-cutting campaign has helped minimize the higher costs that can arise once ARMs reset. Still, many prime borrowers with ARMs are seeing rate increases, which make it harder to make payments.

Jeremy Brandt, CEO of 1-800-CashOffer, says "a high number of people who call us to sell their home are behind in payments and are not subprime borrowers. The typical situation is a person with great credit that bought a big house way over their means using an ARM or interest-only loan."

•Falling home prices. As house prices collapse, especially in states such as California and Arizona, some people with prime loans are finding they owe more than their homes are worth. Many are walking away or delaying payments while they decide what to do.

To sum up - either they can not afford their homes due to job losses or higher payments or they are worried about throwing their money away. In Super Bubble States it could easily take more than a decade or two for homes to be even close to their peak price there is little incentive to pay down.

On another note, our current phrase underwater is too general. The difference in mindset of the owners, being 5% underwater versus being 50% underwater, has got to be huge. The housing bubble community needs to develop some terminology for the differing degrees - they are not the same and should not be thought of or treated as the same. It is not like being pregnant, I would compare it to getting burned - different degrees can result in different outcomes. You have still been burnt - but some just need a bit of treatment and others are fatal. For example "first degree" underwater loan, say 1-5% below market value, can be modified with positive results for the owner. Many of these loans will cost more to foreclose than restructure. Many could cost the owners more to relocate than to be above water. 0A "fourth degree" underwater loan, in the 50% range that we see in Maricopa AZ, it basically a fatal mortgage just on life support until the owners give up.