Thursday, June 5, 2008

Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers

(Housing Wire) While foreclosure activity hit an all-time record in the first quarter, according to statistics released Thursday morning by the Mortgage Bankers Association, an alarming shift of the mortgage mess towards prime borrowers appears to be taking place as well — signaling that the credit crunch that began among those with less-than-perfect credit is now marching onward towards borrowers usually deemed better credit risks.

It shouldn’t surprise anyone at this point to learn that first quarter foreclosure activity was the highest since 1979, the first year MBA’s data on foreclosure activity is available. The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, the MBA said, an increase of 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally-adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago, the MBA said.

And while the overall numbers for the first quarter show that the majority of troubled borrowers are in the subprime credit category, the pace at which prime borrowers are running into a wall now strongly outstrips anything being seen in the subprime arena.

Velocity shifts away from subprime
Among subprime borrowers, severe delinquencies — a measure that includes 90+ day delinquencies and foreclosures — increased from 14.44 percent of loans in the fourth quarter to 16.42 percent in Q1. In contrast, just 1.99 percent of all prime borrowers were severely delinquent at the end of Q1, compared to 1.67 percent at the end of last year, numbers that illustrate the relatively greater distress felt by subprime borrowers.

But it’s the velocity of these changes that’s most worth noting from an investor’s perspective — the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

By splitting out fixed-rate and adjustable-rate DQs, the increasing distress now being felt by prime borrowers becomes even more evident: prime ARMs showed the highest velocity of change of any major loan category in nearly every measure of distress published by the MBA. Severe delinquences increased a whopping 28.71 percent among prime ARMs during Q1, while in comparison, subprime ARMs saw severe DQs jump 18 percent.

It’s a pattern repeated outside of ARMs, too. The velocity of severe delinquencies among prime, fixed-rate borrowers actually came close to doubling that recorded by subprime FRMs during the first quarter. Prime FRMs saw severe DQs increase 12.1 percent in the first quarter, while subprime FRMs posted a 6.7 percent increase in severe delinquencies over the same time frame.

It’s a difference Jay Brinkmann, MBA’s vice president for research and economics, took notice of.

“Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started,” he said. “Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.”

Location, location, location
The old real estate mantra that location matters is proving true as the mortgage and housing mess rolls on, as well. The MBA said that a continued increase in the overall delinquency rate was driven by increases in the number of loans 60 and 90 or more days past due, primarily in California and Florida.

“The problems in California and Florida are extraordinary and they are the main drivers of the national trend,” Brinkmann said. “The quarterly rate of foreclosure starts on subprime ARM loans in California was 9.24 percent.

“This rate, combined with Florida’s rate of 8.25 percent, drove up the national average foreclosure start rate to the point where 43 states were below the national average of 6.32 percent.”

California saw a total of approximately 109,000 foreclosure starts and Florida 77,000, the MBA reported; in contrast, the next highest states were Texas, Michigan and Ohio with between 24,000 and 20,000 each. Taking California, Florida, Arizona and Nevada together, the four states represented 62 percent of all foreclosures started on prime ARM loans, and 84 percent of the increase in prime ARM foreclosure, Brinkmann noted.

“About 20 states had drops in their number of foreclosures started, including Michigan, Ohio and Indiana where problems have been the most severe for the last several years,” he said.

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