Trouble Brewing in the Subprime Mortgage Market
Last month, we reported that mortgage delinquencies charted their biggest quarterly rise ever. Digging more deeply into the numbers, we find even more trouble brewing in the subprime mortgage market.
Of the 8 million active mortgages the FHA insures, 17% were delinquent in July. That ranks as the highest level in history. That translates to about 1.4 million delinquent FHA loans.
It’s not just FHA loans going delinquent in the subprime market. Fannie Mae, Freddie Mac, the VA, and Ginnie Mae are also reporting a surge of delinquencies.
The overall delinquency rate for mortgages on one-to-four-unit residential properties spiked by nearly 4% in Q2, reaching 8.22% as of June 30, according to the Mortgage Bankers Association’s National Delinquency Survey. The jump in the delinquency rate was the biggest quarterly rise in the history of the survey.
The FHA is part of HUD. According to its website, it’s been helping people become homeowners since 1934 with “low down payments, low closing costs and easy credit qualifying.” The FHA does not make loans. It insures mortgages issued by FHA-approved lenders. FHA-backed loans require lower down payments and lower credit scores than conventional loans. In effect, the federal government assumes the risk of risky loans to low and moderate-income borrowers. The FHA serves as an important backstop in the subprime market.
A FICO credit score below 620 is considered subprime. The FHA makes loans to people with scores well below that number. A borrower with a FICO score of at least 580 can qualify for a loan with just 3.5% down. With a 10% down payment, a borrower can qualify with a credit score as low as 500.
An FHA delinquency rate of 17% is a significant warning sign in the subprime market. And in many metro areas, the delinquency rate exceeds 20%. Nassau County-Suffolk County, NY, and New York-Jersey City-White Plains, NY-NJ both have rates over 27%.