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Defaults Go Up and Prices Go Down.
WASHINGTON -- Second-quarter data show that defaults on nonprime mortgages are up, house prices are falling and things are going to get worse before they get better.
The default rate on subprime mortgage loans hit a record 13.44% in June, up 100 basis points in just 30 days, and nearly double the rate in June 2006, according to a Friedman Billings Ramsey report.
Despite the spike in June, FBR managing director Michael Youngblood expects defaults to increase gradually for the rest of this year and into next spring. He is hoping it won't exceed 14.5% by May 2008. The national housing index released by Standard & Poor's/Case-Shiller last week showed house prices declined at a 3.2% annual rate in the second quarter. The S&P/Case-Shiller index went into negative territory in January and prices fell at a 1.4% annual rate in the first quarter.
"The pullback in the U.S. residential real estate market is showing no signs of slowing down," said Robert Shiller, chief economist at MacroMarkets LLC.
National Association of Home Builders chief economist David Seiders noted there has been a "major turnaround in house prices" and he expects to see downward pressure on prices for at least a couple of more quarters.
"If it becomes too quick and too serious then it does affect credit quality and prospective losses on subprime would be made worse," he told reporters.
The foreclosure rate on subprime mortgages jumped to 5.44% in June and that topped the previous record of 5.19% set back in August 1997. The previous record for defaults (13.42%) also was set in August 1997.
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