Mortgage Trouble? It Pays to be Subprime

Amidst the second quarter earnings season, yesterday brought about a quarterly report of a different kind — this one from industry coalition HOPE NOW, which said that mortgage servicers helped a record number of homeowners avoid foreclosure during the second quarter. In June 2008, mortgage servicers completed more than 181,000 mortgage workouts for home loans, HOPE NOW reported; and in the second quarter of 2008, mortgage servicers completed more than 522,000 workouts. The industry coalition touted both numbers as exceeding estimates, and the largest number of workouts in any month and quarter since the group began compiling data in July of last year. All of which is true, but looking underneath the hood at the data, it’s clear that many troubled prime borrowers are getting the short end of the stick relative to their subprime counterparts. A prime problem 197,033 prime borrowers received some form of loan workout during the second quarter, compared to 324,961 subprime borrowers — a fact that, on its surface, may not surprise. After all, the number of troubled subprime borrowers is greater than the number of troubled prime credit borrowers, right? Wrong. The second quarter marked the first time in HOPE NOW’s quarterly data that the number of troubled prime borrowers — all 899,000 of them — exceeded the number of troubled subprime borrowers, which totaled 865,000. Which means that 37.6 percent of subprime borrowers 60+ days behind on their mortgage received some form of loan workout; only 21.9 percent of similarly positioned prime borrowers were so lucky. The numbers get much worse when we narrow our focus just to loan modifications. For prime borrowers, modifications represented just 52 percent of foreclosure volume for the quarter — meaning that for every prime borrower getting a modification, two lost their home. For subprime borrowers? That ratio was at a record 119 percent of foreclosures, meaning that for every subprime borrower getting a modification, less than one lost their home. And yet we continue to hear from consumer groups about the terrible plight of subprime borrowers. The data that’s emerging now makes it amply clear that, if anything, the legislative, regulatory and social focus on subprime mortgages has put those borrowers unlucky enough not to be in that category at a significant relative disadvantage. More data to consider: The number of foreclosure sales among prime borrowers rose nearly 30 percent between the first and second quarters or 2008, while the number of workouts given to those same prime borrowers rose a total of zero percent. Meanwhile, subprime foreclosures rose 14.8 percent, and workouts for subprime borrowers rose 13 percent to meet it. All of which underscores the politics of a housing rescue that, so far, has been geared mostly towards subprime borrowers under a misled perception that says we’re facing a classic haves-versus-have-nots struggle, a case of the rich abusing the poor. That sort of rhetoric sells magazines, and it gets the attention of Congress, after all. But it’s not reality. The data plainly and clearly suggests that the problems facing our housing and mortgage markets are less about class warfare than they are about a problem that affects all Americans. That realization is likely of little comfort to a growing number of prime borrowers that will soon face the loss of their home, given that Congressional efforts thus far have focused almost exclusively on helping the least credit-worthy among us. For more information, visit http://www.hopenow.com.