Prime Borrowers Ask: "What Bottom?"

Bloomberg reports on some new first quarter foreclosure data released today. The good news: subprime mortgages no longer account for the biggest share of new foreclosures. The bad news: that's because prime mortgages do. The worse news: the percentage of loans entering foreclosure is the highest on record, going back to 1972. In short, the good old days are returning -- more people are foreclosing because they're unemployed, not due to wacky subprime or adjustable rate mortgages.

Bloomberg turns to the Mortgage Bankers Association (MBA) for some insight:

The three-year housing decline is proving resistant to efforts by the Federal Reserve and the Obama administration to keep homeowners current on mortgages by allowing them to refinance or sell to buyers enticed by affordable terms. Prime fixed-rate home loans to the most creditworthy borrowers accounted for the biggest share of new foreclosures at 29 percent, MBA said, a sign job losses are hurting homeowners.

"If people don't have a paycheck they can't support a mortgage," Jay Brinkmann, the MBA's chief economist, said in an interview. "The longer the recession lasts the more people run through their savings reserves, leading to higher delinquencies and higher foreclosures."

Just when you thought the housing market may finally be approaching the bottom, unemployment arrives late to the party. The above statistic should be especially alarming. Prime fixed-rate borrowers are the "good guys." They're not the ones who were acting irresponsibly obtaining absurd mortgages that they would never be able to afford. Or if you prefer, they were not the ones being taken advantage of by unscrupulous mortgage brokers. They're the responsible Americans with a solid income, some savings and a high credit score. They never had any trouble making mortgage payments -- until they lost their jobs.

Now that prime borrowers are dominating foreclosures due to unemployment, it seems that Pandora's box has been reopened (if it was ever closed). The housing market may keep plummeting for as long as it takes for unemployment to decrease. Since recovery in employment generally lags that of the broader economy, the housing market may continue to tumble well into 2010.