Suprime is a far too convenient concept for those who would like to depict the housing downturn as contained.Although it has been correctly associated with the first wave of housing boom borrowers who, having poor credit quality at the outset, are now undergoing tremendous stress as housing values decline, rates reset and lending standards tighten, it is just the bleeding edge.
We have to keep in mind that the key difference between a “prime” and “subprime” borrower is, in general, simply their FICO score… essentially the credit rating on the individual borrower themselves.
This makes for a pretty tenuous distinction given that prime and subprime borrowers alike gorged on the fruits of the exotic mortgage era with equal ferocity and neither is totally immune from the effects of a declining housing market and recessionary economy.
Sure, the borrowers with the weakest credit histories and holding the worst loans are going to collapse first but the notion that the prime marketplace will simply float along unscathed is simply naïve.
We have already seen significant stress coming from no-low documentation loans (i.e. home loans made with no income verification) regardless of the credit quality of the borrower.
Many of these loans were used by housing boom “investors” who turned to them as a means of borrowing far more money than they would ever have been extended otherwise.
As we all know, there was a tremendous movement to “invest” in residential real estate during this housing boom.
In fact, the share of existing homes being purchased as a “second” home went from a mere 7% in 2000 to a whopping 39.9% in 2005 and before you jump to some anecdotal notion of baby Boomers buying vacation homes, roughly 83% of these were reported to be for “investment” purposes leaving only 17% for pure leisure.
That represents an awful large cohort of homeowners who will undoubtedly continue to face tremendous stress as the market continues downward.
Lastly, consensus currently, but wrongly, holds the notion that the prime “primary residence” single family and condo homeowner have been largely unaffected by the downturn.
In fact, prime borrowers with adjustable rate loans have been entering foreclosure at an increasing rate and surpassing historical norms.
As the unwinding continues and the economy slows, mortgage stress will be felt widely, across ALL participants and for all products, likely concluding, in my estimation, with the prime Jumbo fixed rate borrowers.
