The New Credit Crunch Victims

Now that the subprime, low-income crowd has taken their lashings, there’s a new Great Recession victim — the faux rich.

Jumbo mortgages — home loans exceeding $417,000 — now have the fastest rising default rates of any mortgage class. According to recent data from First American CoreLogic, 7.4% of these larger-than-life mortgages are currently in some form of default, nearly three times the rate at the start of 2008.

As you can see, when stocks tanked in late 2008, the market for super-sized mortgage loans followed suit:

(Heh, we love the “exclude option ARMs” note… no need to worry about them!)

Is there any reason for this trend to improve? The Obama administration has done plenty to help out their beloved middle-class homeowner… like the $8,000 first-time homebuyer credit, artificially low FHA mortgage rates and several mortgage modification programs. But those programs don’t apply to jumbo loans. Even Fannie and Freddie, masters of mortgage speculation, will no longer stand behind jumbo mortgages.

And the market is blowing jumbo loans a stiff head wind, too. Mortgage rates are roughly 100 points higher for jumbos and inventory — geesh — this is pretty remarkable:


So… an accelerating rate of default; a government cold shoulder; higher-than-typical lending rates; and a huge, growing glut of supply? Could get interesting.

The Daily Reckoning