Subprime Delinquency Shifts

Washington-A Mortgage Bankers Association delinquency report shows that the most affected loan type category is that of prime loans - which due to high unemployment rates have turned prime borrowers into the most at-risk category in 2010.

The number of 90-plus-day delinquent prime loans more than doubled, mostly due to higher unemployment rates.

If all loan types performed poorly in the third quarter collectively contributing to quarter-to-quarter increases in foreclosure inventory and foreclosure starts - according to MBA data - changes in employment rates have resulted in higher delinquency rates primarily in the prime fixed-rate loan market.

"We've had a 5.5 million increase in the number of the unemployed in the country over the last year - that compares to about 2 million loans that are seriously past due," said MBA's chief economist and SVP, Jay Brinkmann.

"The biggest increase in delinquent categories for all loans was in 90-day-plus, up 71 basis points, driven by loans pending a loan modifications and workouts."

The prime fixed-rate loans showed the same pattern with a big increase in the 90-day past due - when the foreclosure inventory and the seasonally adjusted past-due number increased 7.8% or at least one payment past due.

At the same time, up to 22.6% of the prime ARM market is at least one payment past due. While delinquency rates in both markets are increasing and the prime fixed rate represents a bigger component, prime ARMs are performing considerably worse than the prime fixed especially in California, Arizona, Florida and Nevada.

MBA data also show a drop in the relative weight of the subprime loan category within the overall delinquency rate. For example, subprime fixed-rate loans continue to perform better. Foreclosure rates for both fixed- and adjustable-rate subprime loans dropped by 16 and 60 basis points, respectively, in the third quarter.

Is the foreclosure crisis floating from the subprime loan market onto the prime loan market?

Yes and no, Mr. Brinkmann said.

Just as his colleague Frank Nothaft at Freddie Mac, who earlier this month at the SourceMedia Loan Modifications Conference in Dallas stated that the industry's newest concern is the performance of prime loans, Mr. Brinkmann sees the prime loan delinquency rates as an indicator of the future market health.

Lenders almost stopped originating subprime loans, particularly subprime ARM loans since the first part of 2007, Mr. Brinkmann said, and some lenders have been holding them into their portfolio, or in a sense somewhat improved the quality of the loan by modifying a subprime ARM loan into a subprime fixed-rate loan.

Normally loans tend to default in the first there years. Since the market is walking its way through the peak default period for these loans, the expectation is that it will improve. The problem though is the job market.

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