It isn't just subprime anymore

If you're going to have a decimated job base, people are not going to be able to pay their mortgages, even those with good credit who may have received no-documentation loans:

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

The mortgage troubles have been exacerbated by an economy that is still struggling. Reports last week showed another drop in home prices, slower-than-expected economic growth and a huge loss at General Motors. On Friday, the Labor Department reported that the unemployment rate in July climbed to a four-year high.

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Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year.

The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due.

Many borrowers who got these loans during the boom had good credit scores, but many of them owe more than their homes are worth. Analysts believe that many will not be able to or want to make higher payments.

There's been a steady stream of bank failures this year. IndyMac was the most flashy, but banks have been failing very quietly at a fairly steady pace. Even in areas that weren't bubbly, home values have dropped. Houses like mine in my neighborhood are sitting for months at prices that are over $60,000 less than the price at which mine is assessed for tax purposes.

It's easy to say we have little sympathy for flippers, or even for ignorant people who bought more house than they could possibly ever afford because they deluded themselves that the loan officer wouldn't loan them money they couldn't pay back. But when this second wave hits, it's going to affect everyone -- no matter how diligent WE may be about paying the mortgage on time.