Credit-worthy borrowers with straightforward mortgages are entering foreclosure at a record pace, according to a report released on Tuesday by Lender Processing Services, which tracks and analyses mortgages. Foreclosure rates among “agency prime” loans, which conform to guidelines set by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies, have jumped 425 per cent since January 2008, with a particular acceleration in the last two months, LPS said.
That increase is second only to the foreclosure rate of “jumbo” non-agency loans on properties typically worth in excess of $729,750.
Agency prime loans, by far the largest swath of the mortgage market, account for 60 per cent of the 54m loans tracked by LPS. Unlike the loans issued to borrowers with questionable credit that set off the housing crisis, agency prime loans have typically been taken out by those house buyers most likely to repay their debts.
Part of the reason for the increase in prime foreclosures is that other types of failed, riskier loans have already moved through the system, said Kyle Lundstedt, a managing director of LPS applied analytics. As unemployment has remained high and home prices have stayed depressed, “even prime borrowers are starting to be affected”, he said.
The rise in foreclosures of prime loans will be felt most acutely by Fannie and Freddie, which own or guarantee nearly half of the $10,000bn in mortgages outstanding. Both companies have aggressively set aside reserves to cover bad loans.
Through the first quarter of 2010, Fannie and Freddie reported $330bn in non-performing loans. Of the roughly 10 per cent of those loans that have been liquidated, Fannie and Freddie have recovered about 58 cents on the dollar. Rajiv Setia, of Barclays Capital said he expected that to fall to 50 cents on the dollar and non-performing loans to balloon to $550bn over the next three years.
Predicting losses has been complicated by uncertainty over the direction of home prices and unemployment. Analysts estimate cumulative losses at Fannie and Freddie, which were taken over by the government in 2008 and have so far swallowed $145bn in taxpayer aid, could range from $200bn to more than $500bn.
