Subprime Crisis’s Next Stop: Prime Mortgages

Even the best eggs in the mortgage basket are now beginning to turn rotten.
Delinquencies among the nation’s least risky mortgages, known as “prime”mortgages, are rising quickly.
Although large financial institutions have already racked up more than $215billion in losses stemming from high-risk subprime and “Alt-A” mortgages —the poster children of the mortgage crisis — the data that banks releasedthis week suggests that even borrowers with the safest credit profiles arequickly falling behind on their payments.

At JPMorgan Chase & Co., which reported its earnings Wednesday, nearly 3.5%of the bank’s prime mortgages now stand at least 30 days past due, up morethan 200% over a year ago. What’s more, the number of tardy prime mortgageborrowers at JPMorgan is up about 40% since just December.
At Wachovia Corp., which reported earnings on Monday, the number of souringloans within the bank’s “traditional mortgage” business — which emphasizesconservative underwriting guidelines — stands at 1.15% of the business’s$48.9 billion in mortgages, an increase of more than double in the lastthree months alone.

“It’s a sign of the times,” said Jeff Davis, an analyst at FTN MidwestSecurities Corp. “The unemployment rate is starting to drift up, so youwould expect to see rising delinquencies.” The nation’s unemployment ratewas 5.1% in March, up from 4.8% in February.
Analysts also said the nation’s declining housing market is behind the risein delinquencies among historically reliable mortgage borrowers, since manyowe more in mortgage debt than their homes are worth, leaving them withoutthe option of selling the property and repaying the mortgage.
As a result of lost jobs and evaporating home equity, many of thesepreviously low-risk borrowers are quitting their mortgages. Shouldborrowers of prime mortgages continue to fall behind in greater numbers,the trend will affect pools of mortgages that are much larger than thenow-infamous mountains of subrpime debt.
For example, a survey of lenders by the Mortgage Bankers Association, saidthe mortgage industry wrote $656 billion in home loans during the firsthalf of 2007, and 69% of those loans were prime loans. By contrast, only26% of those loans were subprime mortgages. The association said data is not yet available for the second half of 2007.