Prime borrowers the next to default?

First the sub-prime mortgages defaulted. Then the Alt-A, in which otherwise credit-worthy borrowers didn't want to document their income (since it's fairly easy to document full-time income, either these buyers were going for loans that otherwise wouldn't be approved, were self-employed or had other income that wasn't listed on a W-2 form). Now it seems that prime borrowers are also starting to default in numbers that are raising red flags in the mortgage industry. From a CNNMoney.com story:

Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance...

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport...

More foreclosures will add to an already massive oversupply of homes on the market. Inventories are up to about 11 month's worth of sales at the current rate.

Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up about 50% from three years ago, and near historic highs...

The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage.

Consequently, prudent bottom-fishers looking to pounce when the time is right should definitely be taking steps to maximize credit scores (even if it means paying off an old debt with which you don't agree) and saving up a down payment of 10-20%.