Bigger Wave of Mortgage Defaults Coming Our Way

The mortgage and housing crisis is not limited to subprime borrowers and people with bad credit. Plenty of people with good credit overextended themselves with risky mortgages and houses they couldn't afford. The lackluster economy isn't helping. Indymac wasn't brought down by bad credit, but by Alt A mortgages. Those are mortgages to people with good credit who just haven't documented their income.

Now, word is out that people with Prime mortgages, the largest mortgage category are falling behind. The NY Times writes:

"Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

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."

As the article says, prime loans are the biggest part of the $12 trilion mortgage market. If these run into trouble then say goodbye to a couple more banks.

The biggest problems are coming from interest only loans. Homeowners get a couple of years to pay interest only and then their payments step up once principle is included. Those step-up payments are hitting now and many borrowers find themselves paying more for a house that it underwater. Some can't afford the more expensive payments and can no longer refinance, and others are just walking away.

According to one analyst:

"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.”

Gulp.