Default Rates Double on Prime Loans

CU360
May 22, 2009 | COMMENTS

Delinquency rates on the least risky home loans, which account for two-thirds of all mortgages, more than doubled last year, showing credit quality deterioration is spreading through the housing market. "We're in uncharted territory, we've never seen the number this high before," John Dugan, U.S. Comptroller of the Currency, said in a Bloomberg Television interview.

Seriously delinquent prime loans climbed to 2.4% of total loans on Dec. 31, from 1.1% in the first quarter, according to a report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Mortgages in delinquency rose 30% in the fourth quarter, accounting for 4.6% of all home loans.

Prime loans account for most of the 35 million U.S. mortgages, and 553,736 were seriously delinquent—60 days or more overdue—in the fourth quarter, the report showed. Credit quality declined for a third consecutive quarter, as mortgages that are current fell below 90% as of Dec. 31, from about 93% on March 31 last year.

Mortgages modified in the first quarter—to help borrowers keep their homes—fell delinquent 41% of the time after eight months, and second-quarter modified loans had a 46% default rate, the report said. Third-quarter trends "are worsening," according to the agencies.

"For the year and this quarter, we saw the same trend that we saw last time: high re-default rates, no matter how we measured them," said Dugan.

Rising Re-defaults

Higher re-default rates are likely related to stressful economic conditions, notes Dugan, and new loan plans are not producing sufficient reductions to make mortgages sustainable. "Credit quality continues to decline and that's true of all types of mortgages," he said.

Lenders and loan-servicing companies are modifying loans to keep borrowers current, and the Obama administration is helping 9 million homeowners by using taxpayer funds to pay lenders for reworking mortgages. When the payment was cut by more than 10%, about a quarter of the loans were seriously delinquent after six months, the report showed. Left unchanged, 51% were seriously delinquent.

"Where they lowered the monthly mortgage payments significantly, default rates were a lot lower and that's basically what the Obama plan is trying to do," Patrick Newport, an economist at IHS Global Insight, tells Bloomberg.

Borrowers with mortgages that were modified in the first quarter re-defaulted after three months 22% of the time, while loans revised in the second quarter had a 27% failure rate, and third-quarter loans that were 60 days overdue failed 31% of the time, the report showed.

The percentage of borrowers skipping the first payment on a modified loan rose significantly in all categories, except prime loans, the agencies said. Fourth-quarter first-payment defaults on subprime mortgages rose to 4.4% from 3.8% in the first quarter, and overall climbed to 1.4% from 1.2%.