The NYT reports that the delinquency rate on prime mortgages is rising. This is almost as predictable as the fact that the days get shorter after the summer solstice. There are more ten million homeowners, most of them with prime mortgages, who now owe more than the value of their home. Many of these people are struggling to meet mortgage payments on a home purchased at a bubble-inflated price. During normal times, prime mortgage holders are almost never upside down in their mortgage since they purchased their home with a reasonable down payment and the home appreciated ,at least at the rate of inflation, following their purchase. This means that if they have to struggle too much to meet their mortgage payment then they can either borrow against their equity or alternatively sell their home and pay off the mortgage, and pocket the remaining equity. These options are not available to homeowners who are underwater. While many will see their situation worsen due to resetting mortgage interest rates, or alternatively due to job loss as the economy weakens, the fundamental problem is the crash in housing prices. The only real news in this article is that some people employed by the banking industry to analyze the mortgage market were apparently caught by surprise by the rising delinquency rate among prime borrowers.
--Dean Baker
