International Herald Tribune
By Vikas Bajaj
Monday, August 4, 2008
NEW YORK: The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is building with alarming speed.
After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.
But with the U.S. economy struggling, homeowners with better credit are now 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, or alt-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.
While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.
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 are tightening 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.
Much will depend on the course of the economy, particularly unemployment. A weaker job market would push more homeowners toward the financial brink. The U.S. Labor Department reported Friday that the unemployment rate climbed to a four-year high in July. Other downbeat reports last week documented another drop in home prices, slower economic growth than expected and a huge loss at General Motors.