Mortgage Defaults Shifting to Prime Borrowers: Report

America’s most credit-worthy borrowers are defaulting on their loans faster than those with poor financial records, according to a report in the Wall Street Journal.

Cape Coral Home
Cape Coral Home

The rate of mortgage delinquency among prime borrowers is accelerating and could mean that banks will soon be suffering more losses from the usually safe customers than from their less-reliable ones, the report said.

The number of subprime borrowers falling down on their mortgage repayments reached 25 percent in the first quarter, but has now leveled off, with only slight increases in the second quarter, the Journal said.

Prime loans make up 80 percent of US banks’ exposure to mortgages and credit cards, and so could quickly overtake subprime borrowers in causing the biggest financial headache as the recession bites, the report added.

"The subprime pain is in the rearview mirror," Sanjiv Das, head of Citigroup's mortgage business, told the Journal.

Many of the customers with high credit scores have lost their jobs and are struggling to keep up with payments while the jobs market remains extremely weak, the report said.

The total mortgage-delinquency rate, where borrowers were late for at least one payment, rose to a record high of 9.24 percent in the second quarter, according to the Mortgage Bankers Association.

The prime borrowers showed an increase of 5.8 percent in the quarter, compared to a 1.8 percent rise for subprime customers, the report said. However, the overall rate for delinquency still remains significantly lower for prime borrowers at 6.4 percent, compared to 24.4 percent for subprime borrowers, the Journal said.

"We view this as a change in the nature of the problem. These borrowers were underwritten conservatively, and they were able to manage their payments for some period of time," Michael Fratantoni, vice president of single-family home research for the Mortgage Bankers Association, told the Wall Street Journal.