Tuesday, September 8, 2009

Prime borrowers start to default - US

In the US, the long recession and rising joblessness are taking an increasing toll on the nation's most credit-worthy borrowers, who are now falling behind on their mortgage and credit-card payments at a faster pace than people with poor financial histories.

This new trend signals more bad news for US banks. Rising delinquencies on prime mortgages helped drive the total delinquency rate to a record 9.24 per cent in the second quarter of this year, according to the Mortgage Bankers Association. The data reflect loans that are at least one payment past the due date.

The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at subprime borrowers, who found themselves locked into unaffordable mortgages and weighed down by credit-card debt. These borrowers tend to have fewer financial levers to pull to stay ahead of their debt payments, so they default relatively quickly. Many of those bad subprime mortgages have already worked their way through the financial system, causing billions of dollars in losses to the nation's banks.

For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the typical crutches for them, since it is harder to tap the equity in their homes to pay their bills if they lose their jobs.

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money.

(Source: The Australian, from an article published in the Wall Street Journal)

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