9-13-9 Prime Borrowers in Trouble - Dean Graziosi

Hello and welcome. This is Charlie Fuller, real estate coach and investor with the Dean Graziosi Real Estate Academy. This podcast we're going to deal with Prime Borrowers Being in Trouble now 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 their credit card payments at a faster pace than people with the poor financial histories. The mortgage delinquency rate among so called subprime borrowers reached 25% in the first quarter, but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is absolutely doing the opposite. It's accelerating. Since prime loans account for 80% of US bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers. Now the subprime pain basically is in the rear view mirror, said the head of the Citigroup mortgage business, which is seeing delinquencies rise among prime borrowers who make up three quarters of its mortgage portfolio. In many cases, these prime customers who high credit scores afforded them the best interest rates on mortgages and credit cards, they've lost their jobs over the past few months and only now are running out of the temporary fixes that have been keeping them afloat. Now the trend signal actually more bad news for US Banks. Rising delinquencies on prime mortgages helped drive the total mortgage delinquency rate to a record 9.24 in the second quarter, according to the Mortgage Bankers Association. This data reflects loans at least one payment past due. Such delinquencies on mortgages made to prime customers rose 5.8% in the second quarter, compared with a rise of 1.8% among subprime customers. Still, the delinquency rate for prime loans was 6.4%, far below the 25.4% rate for the subprime loans, according to the Washington based trade group. Now this is a change in the nature of the problem. These borrowers were underwritten conservatively and they were able to manage their payments for some time and this was told to us by the vice president of a single family home research for the Mortgage Bankers Group. Now, HSBC holdings, which was one of the first banks hit by a wave of subprime defaults in the US Says its portfolio of prime credit cards loans is actually performing worse than its subprime group. One reason for the switch, the bank has said, is that many of the subprime borrowers are renters who have demonstrated a better payment history on their credit cards than prime borrowers who Are homeowners now getting hit by falling home prices? The focus on prime borrowers comes more than two years after the housing meltdown took its first aim at the subprime borrowers who found themselves locked into unaffordable mortgages and weighed down by credit card debt. These subprime borrowers tend to have fewer financial levers to pull to stay current on their debt payments, so they defaulted relatively quickly. Many of those bad subprime mortgages have worked their way through the financial system, causing billions with a b billions of dollars in losses to the nation's banks. Credit card issuers, meanwhile, have been quick to cut off these subprime borrowers who were in the first wave of the delinquencies and defaults. For prime borrowers, this recession has been especially tough because declining home prices have taken away one of the TYP crutches for them since it is harder to tap into their equity in their homes to pay their bills if they lose their job, according to a report issued this week by the Standard and Poor's. In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings account, reducing contributions to retirement plans, and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say. Now, the reason I bring this up is the fact that many times people feel that they're going to miss the boat. As far as properties coming available and being able to get a great deal, we're seeing here that there's a good indication that we're going to have plenty of inventory for some time. What that time frame is, I couldn't say. I would say it was anywhere from 6 to 18 months, just depending upon the specific area. But it's an interesting side effect because again, we're seeing that the job market is driving the real estate market. Until next time, this is Charlie Fuller.