Subprime, Prime Mortgage Woes Diverge During Q3

Let’s start with the good news, because there is some to be had: during the third quarter, the number of subprime foreclosure sales actually looks to have fallen relative to Q2’s totals. Better yet, the HOPE NOW coalition reported Monday that it set a monthly record in September relative to the total number of loan workouts, exceeding 200,000 for the first time since the coalition began compiling data in July 2007. But HOPE NOW’s data also paints a bleak picture of an increasingly troubled group of prime mortgage borrowers relative to subprime — underscoring the problems now emerging in the Alt-A and option ARM mortgage sectors. In fact, while subprime foreclosures actually fell 3 percent quarter over quarter, according to HOPE NOW, prime foreclosures jumped by more than 20 percent in the same time period, and are now almost 150 percent of year-ago totals. It gets worse: prime borrowers are far less likely to receive a loan modification, as well, should they get find themselves in trouble. Instead, servicers are much more likely to put a troubled prime borrower into a repayment plan — often seen by those in the industry as a band-aid that merely covers a future default. For every prime borrower given a loan modification, 2.5 more were put into a repayment plan during the third quarter; in stark contrast, every subprime loan modification generated less than one repayment plan (0.83, to be exact). The fact the prime borrowers are now facing mortgage distress is one that is largely missed by most consumer groups and community lobbyists, one source told HW. “It’s not politically correct to say, but the fact is that it’s much easier to sell help for subprime than it is for prime borrowers,” said one source, a Capitol Hill lobbyist that asked not to be named in this story. “Prime borrowers are supposed to know better.” Just like their subprime counterparts, however, many prime borrowers decided during the housing boom they needed to get into a home at any cost, and used increasingly risky loan products to do it; so rather than being largely whacked by mushrooming interest rates, as their subprime counterparts have been, these borrowers are now seeing loans recapitalize or reach levels they simply never could afford. Many borrowers lied on their loan applications regarding their jobs and their income levels, as well, according to Interthinx, Inc. a risk and compliance solutions provider to the mortgage industry. “In 2004, Interthinx reported potential misrepresentation in 28.82 percent of the funded loans it reviewed,” said Ann Fulmer, vice president at Agoura Hills, Calif.-based company. “The worst states, including California, Nevada, Arizona, New York, Illinois, Ohio and Michigan, averaged an incredible 32.14 percent.” Fulmer also cited an internal study that found more than $11 billion in originations during the back half of 2007 containing some form of income misrepresentation. That sort of fraud is clearly now coming home to roost. And, unlike subprime, there isn’t a palatable story to sell to lawmakers — but the pain felt by this group of borrowers is likely to be every bit as bad as what was seen by those borrowers in the first wave of subprime ARM resets. HOPE NOW said that the number of homeowners helped in September through mortgage modifications — 98,000 — also set a new record. But it’s clear that the vast majority of those modifications are going to subprime borrowers: Of the 257,444 reported modifications completed in the third quarter, just 70,283 went to prime borrowers. In fact, the third quarter marked the first time since HOPE NOW began collecting data that the number of prime borrowers put on repayment plans exceeded the number of subprime borrowers put into similar plans. With a huge volume of forced option ARM recasts looming, the current trending in the HOPE NOW data suggests a very large mess in 2009. For more information, visit http://www.hopenow.com.