The fall in home prices teamed with the contraction of lending standards by banks has posed great difficulties for those with good credit histories. According to economists, many people are missing the deadline on their payments on credit cards, auto loans and most importantly home loans.
Some time back, borrowers with good credit history, who had a good credit record and paid their bills on time, appeared to be quite protected against the economic damage created by increasing defaults. Now, this rise in delinquency among people with good credit is posing a risk to the tattered housing market and declining economy.
Several prime loans recently allowed borrowers to pay little to no money down on their home, but required they later pay higher amounts due to adjustable rate mortgages. This allowed homeowners to either refinance their home loans, many times using the “cash-out” funds to pay off credit card debt. However, in recent years the housing market has been collapsing due to falling prices. Hence, people with good credit are facing similar financial difficulties faced by homeowners with subprime credit.
The Mortgage Bankers Association reported that about 4% prime mortgages had passed their due dates or were in foreclosure by September end, which was the highest rate since 1998. In the past few years, there has been a surge in prime lending, which has resulted in the rate of foreclosure and delinquency of all mortgages to be 7.3%. It is at an all time high since 1979. Prime mortgages have a lower default rate than subprime mortgages, that is, 24% approximately.
Subprime borrowers, unlike prime borrowers, usually have less assets and lower incomes. They are initially allowed to pay a small part of their loan, while higher payment adjustments “kick-in” in the following months. The interest rate also happens to be much higher than prime mortgages. The reset rate for adjustable loans appears to be declining due to the Federal Reserve having recently lowered its short term interest rates.
However, since the banks have constricted their lending standards, the rate cuts will be of little help due to the devastation done by adjustable rate mortgages and the overwhelming debts loads of many consumers. In places which appear to have a boom in housing complexes, such as Florida, the Southwest and California, the problem has become acute.
Surprisingly, the problem is not solely restricted to mortgages; even home equity lines of credit defaults are increasing. Auto loans appeared to be in trouble as well. Banks have reacted to this alarming situation and have put a ceiling on home equity lines in places where the real estate prices have seen a rapid fall. Some banks are even ready to sketch out new loan terms for prime borrowers and subprime borrowers who are almost three months away from foreclosure.
If you have questions about your mortgage or foreclosure, please feel free to contact me.