The NY Times reports today that although the “first wave of Americans to default on their home mortgages appears to be cresting,” a second, far larger group of potential loan defaults is looming, because now, even “homeowners with good credit are falling behind on their payments in growing numbers.”
The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.
The loan defaults are “likely to accelerate because many homeowners’ monthly payments are rising rapidly.”
The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are “alt-A” loans, many of which were made to people with good credit scores without proof of their income or assets.
“Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”
The problem is that “many borrowers who got these loans during the boom had good credit scores,” but now, as the value of homes is falling, “many of them owe more than their homes are worth,” and “analysts believe that many will not be able to or want to make higher payments.”
Who can afford higher house payments as the price of gas, food and everything else continues to rise? As Peter Bernstein said yesterday in an OP/ED in the NY Times, the “pain from any one of these price increases would have been bad enough.” Being hit with all three at once is more than most consumers can bear. Now, “nothing will turn the economy around until we can restore some sense of hope and security among consumers — perhaps even as food and oil remain painfully expensive.”
The economy teeters on the edge of not just a recession, but also a more profound decline where trouble in any single sector can spread breakdowns throughout the system, driving unemployment to intolerable levels. To sit back and let nature take its course is to risk the end of a civil society.
It’s hard to remain optimistic when the bills keep rolling in, the cost of everything keeps rising and the paycheck seemingly gets smaller or simply disappears due to job loss. To say that many Americans are simply screwed in the midst of all of this is an understatement. And relief won’t come from 4 – 8 years of John McSame. Our best hope is Barack Obama.