Souring Prime Loans Compound Mortgage Woes

By NICK TIMIRAOS A survey found that one in eight U.S. households with mortgages was in foreclosure or behind on its mortgage payments during the second quarter, putting added pressure on programs aimed at preventing foreclosures. While foreclosure starts have slowed on the subprime loans that ignited the mortgage and banking crisis, loans extended to borrowers with good credit are deteriorating at a faster clip as falling home prices and mounting job losses weigh on more households. The Mortgage Bankers Association said its latest survey, released Thursday, showed that 13.2% of mortgages on homes with one to four units were at least a month overdue or in the foreclosure process in the April-to-June period, up from 12.1% in the first quarter and 9% a year earlier. As home sales have picked up in recent months, some were expecting foreclosures and delinquencies to ease. But Jay Brinkmann, chief economist at the MBA, said foreclosures weren't expected to peak until later in 2010 when the economy improves. "Just because we see prices level off doesn't necessarily mean we'll see a big reduction in foreclosures," said Mr. Brinkmann, in part because many homeowners would still owe more than their homes were worth. Deteriorating prime loans are increasingly behind the steady rise in delinquencies and foreclosures. Among prime loans, 9% were past due or in foreclosure at the end of June, up from 5.35% one year ago. For subprime loans, those for borrowers with weak credit records or high debts relative to income, the rate was 39.5%, compared with 30% last year. Prime loans, however, accounted for 58% of foreclosure starts, up from 44% last year. Meanwhile, subprime mortgages accounted for 33% of foreclosure starts, down from 49%. Prime fixed-rate mortgages, usually considered among the safest of all loan types, accounted for one in three foreclosure starts, up from one in five. More than 235,000 borrowers have begun trial mortgage modifications under an Obama administration effort launched in March that focuses on reducing monthly mortgage payments for borrowers who have fallen behind on their payments. An additional 60,000 borrowers with little or no home equity have refinanced to lower rates through a parallel program launched by the administration. But modification programs may not be able to help the growing number of borrowers who are falling behind on their payments because they are losing their jobs. Most loan-modification programs have been designed to help borrowers with loans that reset to higher payments or with high debt-to-income ratios. The first wave of foreclosures that began two years ago, when the economy was still relatively healthy, was triggered by a downturn in housing prices that made it harder for subprime borrowers to refinance mortgages that were resetting to higher payments. Now, foreclosures are increasingly being driven by traditional economic problems, including falling home prices, falling incomes and rising joblessness. Four states -- Florida, Nevada, Arizona and California -- continue to account for a large part of foreclosures in the U.S., but their share of new foreclosures fell to 44% in the second quarter, from 46% in the first quarter. In Florida, nearly 23% of mortgages were past due, including 12% that were in some stage of foreclosure and 5% that were 90 days or more past due at the end of June. Nevada trailed closely behind, with 21% of mortgages that were late or in foreclosure. More borrowers in areas that have seen a big plunge in home prices now have mortgages that exceed the value of their homes. Two-thirds of borrowers in Nevada and nearly half of borrowers in Arizona and Nevada had negative equity at the end of June, according to First American CoreLogic, a real-estate-data firm. Nationally, a third of mortgaged properties were underwater. Foreclosures also continued to rise on loans backed by the Federal Housing Administration, to 3% from 2.8% in the first quarter and 2.2% one year ago. The collapse of the subprime-mortgage market in 2007 has swelled the volume of loans headed to the FHA, which insures lenders against the risk of defaults on loans. FHA-insured loans are available to borrowers who make down payments as low as 3.5%. Originations of FHA loans increased by 30% in the second quarter from the previous quarter, according to Inside Mortgage Finance, a trade publication. Write to Nick Timiraos at nick.timiraos@wsj.com