The Place We Never Suspected the Credit Crisis to Spread

When homeowner-related credit issues began, they involved subprime borrowers–people with less than perfect credit–prompting criticism when the government stepped in with its Hope Now program to help those homeowners avoid foreclosure.

Some asked, why should we help homebuyers who over extended themselves? Isn’t that their problem?

Well, according to a recent New York Times article, it’s now everybody’s problem.

Decreased home prices and stricter lending standards have pushed some homeowners with good credit backgrounds behind on their payments–less than the 24 percent of subprime borrowers which are delinquent or in foreclosure, the Times says, but in some areas, still a staggering amount.

For example, Arizona: The Mortgage Bankers Association found that between the third quarters of 2006 and 2007, ARM-related prime homeowner foreclosures rose 902 percent in Arizona, according to BusinessWeek.

And, all the while, subprime loans continue to do their damage. The MBA says that while subprime ARMs represent just 6.8 percent of the current loans, they comprised 43 percent of the foreclosures initiated during the third quarter of 2007.

(Interestingly enough, a ripple effect is occurring in the U.K.; more than half of the foreclosure orders are subprime borrower-owned homes, despite the fact that–as in the U.S.–they’re just 6 percent of all U.K. mortgages, according to a BBC News report.)

Mortgage payments aren’t the only trouble prime borrowers have stumbled into lately. If they aren’t defaulting on their home loans, the Times says, the prime borrowers are falling behind on their auto loans and credit card payments–at an increasing pace.

And that’s about the last thing that the housing market needs.

“This collapse in housing value is sucking in all borrowers,” Mark Zandi, chief economist at Moody’s Economy.com, told the Times.

• Why is it happening? Many subprime and prime borrowers took out the same kind of loans–adjustable rate mortgages (ARMs) that reset to a higher rate after several years of lower payments–so prime borrowers are just as susceptible to sudden higher post-reset payments as subprime borrowers.

When home prices were rising, both groups had more leeway to refinance or sell; now they are both facing high resets. The bottom line? Too many loan programs allowed too many homeowners to buy homes out of their comfort level with little to no money down on the hopes the market would keep rising–and it didn’t.

• Why is it a problem? Because prime borrowers carried the weight of the subprime borrowers–for awhile, they were thought to be balancing out some of the subprime defaults, according to the Times.

• Where is it happening? The states with the highest increase in prime ARM foreclosure starts in the third quarter of 2007–Florida, Nevada, California and Arizona (which would help explain that horrific rise in prime homeowner foreclosure starts)–have a large amount of investment properties that were purchased to flip and make a profit, according to BusinessWeek.

Arizona had the eighth highest foreclosure rate in 2007; Nevada and Florida ranked No. 1 and 2, according to RealtyTrac.

And–unfortunately–those aren’t the only places experiencing prime problems. For the second half of our look at the prime borrower slip, including a look at what factors will heavily influence the prime market’s future, check out MHN’s blog tomorrow!