Subprime Payment Rates Improve — For How Long?

The credit ratings service Fitch says that payment rates on subprime montages improved for the first time in four years. “The share of subprime loans that were at least 60 days past due or in foreclosure fell to 46.3% in March from 46.9% a month earlier,” according to The Wall Street Journal. The number is not more really than a rounding error and may mean nothing at all.

There is a great deal of speculation about why the tiny improvement occurred. The most convincing argument is that residents of homes with subprime mortgages received tax refunds last month. If so, the phenomenon will be short-lived.

Defaults on subprime loans will almost certainly get worse again. The reasons are simple and have to do with the causes of most mortgage payment problems.

Unemployment and under-employment in the US have not improved during the last few months, even if federal government statistics showed an extremely tentative uptick in March. The rate of those out of work or looking for full-time work continues to hover around 17%. The people who are part of this population cannot pay their home loans in the future if they have not defaulted already.

The incentives for subprime borrowers with the financial wherewithal to continue to cover their mortgages is undermined by the temptation to walk out of their homes and hand their keys to the bank. Eleven million mortgages are underwater in the US. The government has several programs in place and more coming to make the situation more palatable for homeowners, but the help has done little to keep people from continuing to default. Many mortgage holders  simply believe that living in a house which will never have any equity value is a waste of money which could be used to cover other costs of living.

Until the issue of underwater mortgages and joblessness are resolved, the rate of default among homeowners, those with subprime home loans included, will not improve.

Douglas A. McIntyre