The Place We Never Suspected the Credit Crisis to Spread (Part Two)

Yesterday, we discussed the prime mortgage market’s difficulties–which include homeowners with good credit falling behind on their payments.

The causes are similar to the factors that pushed the subprime sector into rocky waters. And–even though considerably less troubled prime borrowers exist–the prime defaults are cause for concern.

What’s next?

Well, according to the Mortgage Bankers Association, the highest rate of prime mortgages since the MBA began tracking prime and subprime mortgages in 1998 were delinquent or in foreclosure at the end of September.

As the country tries to spur residential building and the housing market by unloading some of its housing supply, it’s not helping that we’re adding foreclosed properties to the number of homes on the market. Nearly half the home sales in some parts of California recently involved foreclosed houses, according to USA Today.

However, some help–along with measures to prevent the situation from happening again–is on the way, in the form of:

  • Reduced Rates. The Fed has cut short term interest rates, which should help ease reset rates.
  • More realistic home equity credit. Banks are also starting to cap home equity lines of credit–in Florida, one of the prime- and subprime-damaged states, some lenders have moved to making home equity loans based on 90 percent (or less) of a home’s value instead of 100 percent, the Florida Times-Union reported recently.
  • Increased consumer credit monitoring. In addition, credit card companies are reducing limits–and increasing penalties–for high-risk customers, which may help curb growing debt in the future (although it will undoubtedly cause problems at first).

USA Today reported in early February that Bank of America plans to periodically review consumers and raise rates on some they perceive to be a risk–not necessarily because of the current mortgage issues, but some analysts say is related to overall lender losses. Consumers are, after all, falling behind on all sorts of payments.

  • A plan to prevent foreclosure. And then there is Project Lifeline, the new plan announced by Bank of America, Citigroup, Countrywide, J.P. Morgan, Washington Mutual and Wells Fargo last Tuesday, which pledges to help foreclosure-facing borrowers work out a way to keep their home.

However, the plan is barely a week old and has already come under criticism from the Center for Responsible lending, which called it a "rope that is too short" due to its limitations, which exclude anyone who has missed more than three months of payments and has a foreclosure date less than 30 days away.

If more prime borrowers become entrenched in the subprime cycle, the blow to the economy could be unimaginable.

Have we seen the worst of the damage? It’s hard to say. After all, did we really predict the full extent of the subprime fallout when it started?