Housing Credit Quality

Kevin Drum is hosting a good graph from the LA Times on the very rapid increase in the foreclosure rates for California mortgages. California was the scene for a good deal of the more exotic and dumb mortgage practices that fueled the housing bubble, so it should be a good leading indicator. This graph is scary, especially when combined with the high inflation numbers that we are seeing which indicates that any hope of the Federal Reserve bailing people out by slashing interest rates again is a false hope.



Earlier this week, Tanta at Calculated Risk grabbed a great chart from Fitch on the credit quality of performing and non-performing subprime borrowers.




Some good news, the subprime borrowers who are in default are slightly worse credit risks than the performing loans. Underwriting is still working to some degree. The bad news is that the FICO score spread is decreasing as the following graph shows: [data derived from the Fitch chart and all errors are mine]



As the subprime borrower who defaults becomes more similar to the non-defaulting borrower, the risk of even more problems in this market increases. Even more worrisome is credit quality is being questioned in Alt-A and potential problems are cropping up in the prime market.