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The New York Times
Mortgage Crisis Spreads Past Subprime Loans
Like subprime mortgages, many prime loans made in recent years allowed borrowers to
pay less initially and face higher adjustable payments a few years later. As long as home
prices were rising, these borrowers could refinance their loans or sell their properties to
pay off their mortgages. But now, with prices falling and lenders clamping down,
homeowners with solid credit are starting to come under the same financial stress as those
with subprime credit.
“Subprime was a symptom of the problem,” said James F. Keegan, a bond portfolio
manager at American Century Investments, a mutual fund company. “The problem was we
had a debt or credit bubble.”
The bursting of that bubble has led to steep losses across the financial industry. American
International Group said on Monday that auditors found it may have understated losses on
complex financial instruments linked to mortgages and corporate loans.
The running turmoil is also stirring fears that some hedge funds may run into trouble. At
the end of September, nearly 4 percent of prime mortgages were past due or in foreclosure,
according to the Mortgage Bankers Association.
That was the highest rate since the group started tracking prime and subprime mortgages
separately in 1998. The delinquency and foreclosure rate for all mortgages, 7.3 percent, is
higher than at any time since the group started tracking that data in 1979, largely as a
result of the surge in subprime lending during the last few years.
An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at
Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004,
when he refinanced his home in Northern California to take cash out to pay for his
daughter’s college tuition.
Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot
afford to make the higher variable payments on his mortgage, and he cannot sell his home
for more than his $740,000 mortgage.
“The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t
sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months
trying to pull this out of my savings.”
The default rate for prime mortgages is still far lower than for subprime loans, about 24
percent of which are delinquent or in foreclosure. Some economists note that slightly more
than a third of American homeowners have paid off their mortgages completely. This
group is generally more affluent and contributes more to consumer spending and the
economy relative to its size.
Unlike subprime borrowers, who tend to have lower incomes and fewer assets, prime
borrowers have greater means to restructure their debt if they lose jobs or encounter other
financial challenges. The recent reductions in short term interest rates by the Federal
Reserve should also help by reducing the reset rate for adjustable loans.

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The New York Times
Rate of Home Foreclosures Hits Record
By REUTERS
Published: September 7, 2007
WASHINGTON, Sept. 6 (Reuters) — The rate of home loans in
foreclosure rose to a record level in the second quarter of 2007 as more
homeowners in California, Florida and other states could not refinance
their adjustable-rate mortgages, a trade group said on Thursday.
The Mortgage Bankers Association said 0.65 percent of loans entered
foreclosure on a seasonally adjusted basis, 7 basis points higher than the
previous quarter and 22 basis points higher than a year earlier.

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