For the first time since the boom of subprime mortgages in the middle of this decade, prime borrowers, or those with good credit, are making up the bulk of new defaults and foreclosures.

According to the Mortgage Bankers Association Thursday, in the first quarter of 2009, about 6 percent of all prime borrowers with fixed rate home loans were either late on their mortgage payments or in foreclosure.  And 9.12 percent of all homeowners with loans of any kind were delinquent, the highest percentage on record in the history of the MBA’s National Delinquency Survey.

While almost half of subprime or poor credit homeowners are behind on payments or about to lose their homes, this new trend with prime borrowers is more worrisome. These are the people who actually have a history of making their payments on time and using financing sensibly.

“In looking at these numbers, it is important to focus on what has changed as well what continue to be the key drivers of foreclosures,” said MBA chief economist Jim Brinkmann.  

“What has changed is the shifting of the problem somewhat away from the subprime and option ARM/Alt-A loans to the prime fixed-rate loans.  The foreclosure rate on prime fixed-rate loans has doubled in the last year, and, for the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures.  In addition, almost half of the overall increase in foreclosure starts we saw in the first quarter was due to the increase in prime fixed-rate loans.  More than anything else, this points to the impact of the recession and drops in employment on mortgage defaults.”

The nationwide economic troubles have meant that plenty of good credit homeowners have been laid off from their jobs and are simply left without the funds to keep current on their mortgages. And even with government programs to help modify mortgages with lower payment and interest rates, it will be hard to qualify without a secure income. The MBA predicts things will get worse before they get better. “Better” will probably happen at the end of 2010, they say.

Lowering monthly mortgage payments for struggling homeowners, without reducing the principal balance, will not significantly reduce the number of defaults, according to a new study from Fitch Ratings as reported in the Wall Street Journal.

In fact, Fitch predicts that up to 75 percent of all modified loans will go back into default within 12 months. Diane Pendley, managing director for Finch, concluded that underwater home loans are to blame.

“Loan modifications hold clear value for many homeowners provided the modified payments are sustainable, but more often than not reducing the home payments to an affordable level may not be enough to rescue borrowers who are overextended on other credit and expenses,” she said. “With continued home value declines in many  markets, there is  growing evidence that some homeowners are voluntarily walking away from their homes even if they can financially afford to stay.”

The government has been vigorously encouraging mortgage lenders both verbally and monetarily to modify loan payments and interest rates for their customers on the brink of default and foreclosure. The Fitch study found that 7 percent of prime residential mortgage-backed securities were modified, 18 percent of which were subprime or poor credit loans.

So are falling home prices really to blame for re-defaults? While Fitch maintains that mortgage loans worth  more than the current home value are too financially depressing for homeowners to deal with, there may be more to the story.

I like what Douglas McIntyre had to say about it on dailyfinance.com :

The more likely reason that the programs do not work is the rise in unemployment and the increase in the business practice of turning full-time workers into part-time workers, sharply cutting many people’s incomes. Even with monthly home payments cut, mortgage holders can’t pay with money that they don’t have.

If the mortgage modification programs are going to work, two things have to happen, both of them unlikely. Unemployment would have to bottom soon and mortgage principals would have to be lowered as part of the loan modification process. Neither of those is likely to change soon.

Home builder confidence is up for the second straight month and those in the building industry are more than willing to say that indicates the bottoming out of the ailing housing market.

“The bottom line is there are good signs on the horizon,” said Jerry Howard, president and chief executive of the National Association of Home Builders. “It’s fair to say we could be closing in on the bottom, but we have a long road ahead of us.”

NAHB Chief Economist David Crowe seemed even more upbeat.

“The fact that the May [index] continued to tick up from April’s five-point increase provides confirming evidence that the improved confidence level was no fluke. This continued increase indicates that home builders feel we’re at or near the bottom of the market and that positive signs lie ahead for builders and potential home buyers, provided that builder access to production credit significantly improves.”

The NAHB/Wells Fargo housing market index increased by two points to 16 in May. This measure of builder confidence in the market is still near record lows and any score below 50 indicates negative sentiment about the market. So there are slightly fewer builders who feel badly about the state of things now than there were last month.

What’s interesting to me is how slight differences in these types of reports make such a big difference in the mood of the broader markets. National and global stock markets rose today after the NAHB announcement.

So if all the mortgage and housing markets are so hinged on public sentiment it seems like we should all just talk a little more rosily about our home loan and financial situations, right? Or was inflated optimism and over confidence what got us into the current mortgage mess in the first place? Hmm…

After rising last week on news of slowing job loss and Dow Jones gains, mortgage interest rates showed little movement this week. Mixed economic news kept things from changing much.

According to mortgage giant Freddie Mac today, the average rate on a 30-year Fixed Rate Mortgage inched up to 4.86 percent, from 4.84 percent the previous week. But to put things in perspective, the current rate is still way below the average 6.01 percent rate from the same time last year.

Freddie Mac’s vice president and chief economist Frank Nothaft said that rates stayed relatively unchanged on alternating rising unemployment and increased housing affordability.

“The economy lost 539,000 jobs, less than the monthly job loss of the past five months, and the unemployment rate rose to 8.9 percent…Relatively low house prices and interest rates are clearly helping first-time homebuyers. Housing affordability for the median first-time buyer reached an all-time record high in the first quarter since the NAR index began in 1981. Consequently, first-time homebuyers accounted for half of existing home sales in the first three months of this year, the NAR reported.”

Looking back over the past two months of mortgage rate averages, rates have only fluctuated within a 0.20 percentage point range, generally slipping down for a few weeks and then jumping back up for a week before sliding downward again. The fact that the range has been so limited tells me that overall not much is happening (yet, at least) in the mortgage market. And I don’t see rates moving much higher than 5 percent before some seriously positive signs come in the form of rising home sales and median price home values. It may happen gradually, it may be dramatic, but whatever it is, it hasn’t happened yet for the U.S. housing market.

Demand for refinance loans are on the rise and have been for many months now. And for those can qualify to refinance, the savings can be very significant as interest rates are at ultimate rock bottom. In fact according to the Freddie Mac quarterly Refinance Report,  roughly half of all those who refinanced during the first quarter of 2009 saw a decrease in their annual mortgage interest  by 20 percent or more. That works out to be an interest rate reduction of about 1.25 percentage points.

 “Mortgage rates for conventional conforming 30-year fixed-rate loans reached 50-year lows in the first quarter of 2009 in Freddie Mac’s Primary Mortgage Market Survey®, and averaged just 5.06 percent over the quarter with 0.7 points. With mortgage rates this low many people were able to make their mortgage payment a lot lower,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “The payment savings from ‘rate-and-term’ refinancing done during the quarter is about $160 a month on a $200,000 loan and in aggregate this adds up to about $2.5 billion in extra spending cash in the pockets of those homeowners to spend over the coming year. If this pace keeps up for the rest of 2009, that will provide homeowners about $10 billion in mortgage-payment savings during the first year after refinance.”

He added that “we expect refinance activity to be very high in the near term. These programs make it possible for borrowers with current loan-to-value ratios of up to 105 percent to qualify for a refinance that until recently they may not have been able to do.”

And mortgage blog refinancingcondo.com recently spelled out how you can benefit from the new Obama refinance plan if you are looking to cash in on these savings. Here’s how the plan can help you, according to that site:

“-Refinancing or modifying a home mortgage would be easier and more streamlined for all homeowners.

-Help homeowners who have seen their property value drop by 15% or more as a result of this mortgage crisis.

-Help homeowners who are facing foreclosure or defaulting on their mortgage by allowing them to refinance their home mortgage into a fixed rate 4.5% home mortgage.”

Now’s the time to refinance if you can. You are not likely to see rates get any lower any time soon and the savings can be phenomenal!

Mortgage interest rates rose in the latest week, and according to Freddie Mac the root cause was economic data indicating housing market recovery.

“Mortgage rates rose slightly this week amid positive economic news that the economy may be approaching the bottom of the recession,” said Frank Nothaft, Freddie Mac vice president and chief economist.

Specifically Nothaft named the following indices:

• April consumer sentiment was revised above market consensus
• The ISM Manufacturing Index ‘exceeded market expectations’ in April
• Fed Chairman Ben Bernanke predicted the economy will bottom out soon before heading up at the end of the year
• Pending home sale rose for the second consecutive time in March
• Demand for prime mortgages rose in April for the first time in two years

Based on those factors, rates on interest rates on 30-year fixed rate mortgages increased to 4.84 percent in the latest week, excluding fees, up from 4.78 percent.

Not everyone is convinced that the week’s news are true signs of renewed market strength. A post on the http://www.thetruthaboutmortgage.com/mortgage-rates-rise-on-good-news saw it this way:

“But these two items [pending home sales and increased prime demand] can easily be attributed to the sale of distressed properties and the record low interest rates pushing demand higher, which to me isn’t the sign of a recovery.”

Personally, I tend to agree more with Freddie Mac, though. It has been a long time since we have seen so many positive indicators in one week, and the market and our entire economy seems to be very sensitive to general positive or negative feelings about the state of things.  So, maybe things might actually be looking up, and with rates much lower than the 6.05 percent from this time last year, home loans are still very affordable…for those who qualify.

There may be reason to hope that the housing market is starting to show signs of life again. Two recent housing reports have indicated that things are looking up.

First, an article on the USAToday website reported that although demand for almost all consumer and business loans declined in the latest quarter, the Federal Reserve says that demand grew for prime mortgages, or good credit mortgages, marking the first increase since the first part of 2007. We can certainly attribute a great deal of that heightened demand to rock bottom interest rates.

Interestingly, the increase in demand for prime loans came during the same time that roughly 50 percent of banks were tightening their lending standards on those types of mortgages, and 65 percent were toughening up the requirements for non-traditional loans.

Not all parts of that report were entirely hope-inspiring though. The Fed survey found that more than 70 percent of all banks expect to see a decline in the quality of their portfolios. Still, we can take the points of light where we can get them these days.

The second report comes from the National Association of Realtors. Its Pending Home Sales Index showed that pending sales of existing homes climbed upward in March, making two consecutive months of increases.  The NAR said that signed contracts rose 3.2 percent in the latest period largely due to a flood of first-time homebuyers taking advantage of excellent mortgage interest rates.

While the association warns that it may still take several months before sales get real momentum, NAR President Charles McMillan tried to put things in perspective.

“Compared to a year ago, the typical family can pay much less in mortgage costs for the same home, or buy a better home without necessarily increasing their monthly payment,” he said. “For buyers who’ve been on the sidelines and have good jobs, the market has never looked more favorable. Homeownership has always offered immediate benefits and long-term value, but the advantages in today’s market are unique.”

So if you fit into that segment of society that has good credit, lots of money in the bank for a down payment, and a stable, steady job – now is the time to act! For the rest of us, the waiting game continues…