In the second quarter of this year, the largest share of foreclosures didn’t came from a type of loan that bankers and investors once believed was safe but turned out to be far riskier than anyone expected. The particular class of mortgages we’re talking aaccounted for 58% of foreclosure starts, passing the much derided subprime, adjustable rate mortgages.
Since 2007, this has been a familiar story. Once safe lending practices now seem foolishly risky. Banks that thought they were engaged in conservative lending practices, discovered that default levels were higher than anyone could have imagined. Borrowers who bought homes they believed they could afford with mortgages they thought they understood, stop paying for one reason or another. The worst of the fearmongers–once deemed irresponsible and panicked by much of the markets–have been proved to have not been fearful enough.
Except this time the toxic mortgages aren’t fancy at all. They’re regular old prime mortgages. That’s right. Last quarter, prime mortgages accounted for 58% of foreclosures. And among theose prime mortgages in foreclosure, the largest segment–32%–was composed of fixed-rate mortgages.
As the chart below from the Wall Street Journal shows, this puts fixed-rate, prime mortgages close to where subprime adjustable rate mortgages were a year ago. Of course, the overall level of prime mortgage foreclosures is still far lower than subprime foreclosures. Just 9% of prime loans are in foreclosure, versus 39.5% of subprime loans. Both rates are still climbing.
To put this slightly differently, the serious deliquencies on prime mortgages now stand where subprime were back in the third quarter of 2007. By that point we were well into what was then quaintly known as the “subprime crisis.” So it’s fair to say we’re now experiencing a prime crisis.
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