By: Roshawn Watson
The next threats to the US real estate market recovery apparently are “prime borrowers:” those with good credit.
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Currently, prime borrowers are defaulting on their mortgages at significantly higher rates than years prior. Consider that in 2006, the delinquency rate for loans under $417,000 was 1.38% compared to 2.44%. Although the absolute numbers may still be low, the increase represents almost double to risk for lenders and hundred of millions of dollars for the lenders.
For jumble loans (those for above $417,000), the default rate increased to 4.03% compared to 1.11% a year earlier.
Moreover, prime loans issued last year have nearly triple the default rate of those issued prior to 2007. Note that WaMu (Washington Mutual) and JP Morgan Chase are already reporting high delinquency rates for this year as well.
Recall, that housing prices are dropping faster than during the Great Depression, primarily because subprime borrowers were defaulting on their loans (for a fabulous illustration of how we got into the mortgage crisis, please refer to this link). Note that home prices are already worth 20% less than during 2006, according to the S&P; Case-Schiller Price Index.
The Relationship Between Home Prices and Defaults
Perhaps more troubling is that there is a strong correlation between home prices and defaults. As prices continue to decline, there are more defaults, prompting prices to decline further.
Tightening Lending Criteria
Additionally, lenders are now qualifying even fewer borrowers reminiscent to how credit cards have finally began to tighten their credit worthiness criteria (long over overdue because even dogs, babies, and dead individuals were able to get credit cards last year).
A recent poll suggested that around 60% of the loan officers had tightened lending standards for prime mortgages during the first quarter of 2008. Additionally, loans are becoming more expensive in some cases.
As more restricted credit becomes the norm, the housing market recovery will likely be prolonged. Eventually, many qualified borrowers and real estate investors are banking that prices will decline even further as the house inventory continues to increase, which appears to be a safe bet for now.
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Copyright 2008, Roshawn Watson, Pharm.D. All Rights Reserved.
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