S&P warns on rise in US mortgage defaults

The number of US prime borrowers behind on their home loan payments has spiked in recent months, signalling potential problems for banks and investors.

Standard & Poor's said higher unemployment combined with the prolonged housing market slump had afflicted even the highest quality borrowers.

The dollar volume of prime mortgages in some stage of delinquency or default rose 13.8 per cent between March and June, according to a new study of private-label prime, subprime and so-called Alt-A home loans conducted by S&P.

Alt-A mortgages are home loans made to borrowers with slightly better credit histories than subprime borrowers.

These three categories of mortgages,?totalling $1,620bn, are not backed by government-sponsored enterprises Fannie Mae and Freddie Mac but were originated by banks and packaged into securities sold to investors.

"Today's prime borrower is far more at risk than the prime borrower of any other cycle," said Michael Thompson, managing director of market, credit and risk strategies at S&P. "If unemployment continues to get worse, this is where you will have the greatest vulnerability and it may not yet be factored into the valuation of residential mortgage backed securities."

Prime loans have less than half the originally securitised loan balance outstanding, after prepayments and losses, and the lowest amount of non-performing loans.

Analysts say the rate of growth in problem prime loans could signal trouble for the much larger "conforming" prime loan market. These are loans backed by Fannie Mae and Freddie Mac.

Alt-A and subprime home loans, which have been at the epicentre of the mortgage meltdown over the past two years, showed some signs of stability in S&P's study. Non-performing balances of Alt-A mortgages rose just 3.2 per cent in the second quarter, while the dollar volume of non-performing subprime mortgages fell 4.2 per cent.

In the subprime mortgage sector, where loans were made to borrowers with patchy credit histories during the housing boom, S&P said the most troubled borrowers have by now defaulted. This means that securitised subprime home loans could be past the peak for defaults.

Despite signs of a bottom for home prices, the rating agency warned that rising unemployment continued to place mortgages at risk of default.

"Normally, prime borrowers who fell into trouble would likely sell their homes and repay their mortgages, ensuring the bank was made whole," said S&P. "However, today's housing market places many of these prime borrowers underwater and thus unable to pay off their loans, even if they could find a buyer."

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