Here's a scary thought about the latest bad news on housing: A surprising increase in late loan payments and defaults among home owners with good credit is so far coming from traditional woes, like divorces, job losses and unexpected medical bills.
The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.
These exotic loans were the only way many borrowers — even those with good incomes and sterling credit histories — could afford to get into the housing market as home prices soared in the last decade. But now those decisions are looking suspect.
That was one of the messages that sent a jolt through the mortgage industry and the stock market on Tuesday after Countrywide Financial Corp. reported its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults.
Countrywide, whose shares have lost 11.7 percent of their value in the last two days, laid part of the blame for the uptick in delinquencies on borrowers with good credit who had taken out prime home equity loans.
Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas.
"As housing values weaken broadly and the job market slows in these areas that we're focused on, all borrowers will be touched," said Mark Zandi, chief economist at Moody's Economy.com.
He said subprime borrowers, those with spotty credit records, will likely show the greatest number of defaults. "But even prime, fixed-rate first mortgage borrowers will experience more credit problems," Zandi said.
The problems are expected even though the U.S. unemployment rate is currently at 4.5 percent, still low by historical standards.
More signs of the housing slowdown surfaced Wednesday as the National Association of Realtors reported that sales of existing homes fell by 3.8 percent in June to the slowest pace in more than four years.
In reporting its earnings, Calabasas-based Countrywide, the top U.S. mortgage lender, said it was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments on time.
The company said borrowers becoming unemployed or divorcing were the leading reasons why many borrowers with prime loans were falling behind on payments. And company officials told analysts on a conference call that the uptick in missed payments was not due primarily to borrowers seeing their loans' interest rate reset, triggering higher monthly payments.
Still, the mortgage industry anticipates that it could face a rash of defaults in coming months as many adjustable mortgages originated in 2005 and 2006 during the height of the housing market frenzy begin to reset to higher interest rates.
The loans, initially attractive options for buyers because of their cheaper "teaser" interest rates, can adjust higher after as little as two years. Even a small percentage increase can translate into a payment shock.
"The losses are just beginning," said Christopher Brendler, an analyst with Stifel Nicolaus & Co. Inc.
"Housing is increasingly a problem, prices are likely to go down, and so these loans underwritten in the best of times will now season in the worst of times," he said.
The mortgage industry has already tightened lending standards in response to the jump in defaults by subprime borrowers.
With fewer first-time buyers entering the market, homeowners in the mid-tier of the market, who tend to be among the most creditworthy, prime borrowers, are having a tougher time selling their homes.
"The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that's hitting the prime sector," Brendler said.