The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. That's up about 50% from three years ago, and near historic highs. Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. Inventories are up to about 11 month's worth of sales at the current rate. More foreclosures will add to an already massive oversupply of homes on the market. "Price declines lead to more defaults, which leads to more price declines." Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index.Īnd there's a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors. "Home prices will drop for quite a while - maybe several years," he said. Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport.
Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.
The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Prime loans are just the latest class of mortgages to suffer a spike in failure rates. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.Īlso last month, JP Morgan Chase ( JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. Washington Mutual ( WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. "The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.Īnd prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance. The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American ( FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.ĭelinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. NEW YORK ( ) - Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.
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