And now its credit-worthy home owners with prime mortgages that are jumping ship.
Foreclosure rates for loans that conform to the guidelines of now government owned Fannie Mae and Freddie Mac have jumped 425% since January 2008. And the monthly rate of foreclosures has accelerated in the last two months, according to Lender Processing Services.
Unlike the subprime mortgages that set off the global financial crisis, conforming agency prime mortgages are held by borrowers regarded as the best credit risks.
There’s bad news and good news in these numbers.
The bad news should be pretty obvious: The last thing that Freddie Mac and Fannie Mae need is more bad mortgages. The two entities—I don’t know quite what else to call them at the moment—own or guarantee almost half of the $10 trillion in outstanding U.S. mortgages. At the end of the first quarter they reported $330 billion in non-performing loans. Since the only thing that’s keeping Fannie and Freddie alive is an unlimited credit line from U.S. taxpayers, more mortgages going bad means more taxpayer money down this black hole. (That unlimited credit line from taxpayers is also just about the only thing keeping the mortgage market alive at the moment as well.) So far taxpayers are on the hook for $145 billion.
The good news is harder to see but it’s there. A jump in prime mortgage foreclosures is a sign that the mortgage crisis is entering its final stages. The big lump of foreclosures in sub-prime and alt mortgages have been working their way through the pipeline for months. During that period foreclosures of prime mortgages lagged. If you’re credit rating was good enough for a prime mortgage, you probably had enough money in the bank to keep paying your mortgage for quite a while after you got laid off. But now with unemployment still near 10% and the prospect for a job looking grim, prime borrowers too are throwing in the towel. (Yes, people with good credit scores get laid off in a recession.)
How long this final stage lasts depends on the economy. The longer that people don’t have jobs, the more people will default. And until more people have jobs the default rate won’t go down and the housing sector won’t pick up.