There can be no remaining doubt that the nation's mortgage crisis has become a problem for prime credit borrowers: data released by the HOPE NOW
coalition on Wednesday finds that prime foreclosure starts have finally moved ahead of subprime foreclosure starts, for the first time since the industry coalition began collecting data in July of last year -- and likely for the first time in a much longer timeframe, as well, sources suggested to HousingWire Thursday afternoon.
It's a point that was missed in many media reports touting HOPE NOW's success in preventing more than 2 million foreclosures during the past year; but it's a critical shift that should be garnering more public policy focus than it currently is.
HOPE NOW's monthly data shows that during July, foreclosures were initiated on 105,000 prime borrowers and 92,000 subprime borrowers. Prime foreclosure starts in July were well more than double the 51,000 recorded one year earlier, and up almost 10 percent from June; in comparison, subprime foreclosure starts in July were up 22 percent from one ago, and up 10 percent month-over-month as well.
"It's easy for lawmakers to paint a picture of poor borrowers taken advantage of by big, bad lenders," said one source, a bank executive that asked not to be named. "But that story falls apart when you start to see even those higher up the credit ladder struggle."
For both prime and subprime borrowers, July's foreclosure start totals were the highest since HOPE NOW began collecting data last year; while such a jump likely reflects seasonal trends, seeing the trend towards increased foreclosures emerge a month or two earlier than most experts would usually expect is a telling signal that current market turmoil has yet to run its course.
And for prime borrowers, in particular, it appears that things will get much worse before they get better.
Why this is likely to be the case lies in surging use of repayment plans by servicers dealing with prime borrowers -- HOPE NOW's data shows that 57,822 troubled prime borrowers received a repayment plan in July, equal to 72.3 percent of all workouts completed during the month. In comparison, just 48 percent of troubled subprime borrowers were placed into similar repayment plans, with servicers favoring loan modifications instead.
A similar reliance on repayment plans earlier on in the subprime credit cycle has proven to be at best a mixed blessing for investors, as HW covered in early January
. On July 16, Moody's Investors Service
noted that 42 percent of subprime adjustable-rate mortgages
modified during the first half of 2007 had become 90 or more days delinquent by the end of March 2008. That number was well north of 50 percent when looking at previously-modified loans 60 or more days delinquent.
Which means that a loss mitgation department’s heavy reliance on repayment plans for prime borrowers — either to keep roll rates acceptable, or because resources are being applied more directly towards subprime borrowers — could be setting up some servicers, and their investors, for a nasty surprise not too far down the road.
Not that most investors in Alt-A and prime jumbos aren't already being surprised with near-daily downgrades of investment-grade securities, of course. But as HOPE NOW touts the successes it's members are having at preventing some foreclosures, it's clear that such success is largely limited to the credit class deemed most socially acceptable for such an effort.
For more information and statistics, visit http://www.hopenow.com