Comparing Patterns of Default among Prime and Subprime Mortgages
We have all heard a lot in recent months about the soaring number of defaults among subprime mortgage borrowers; and while concern over this segment of the mortgage market is certainly justified, subprime mortgages account for only about one-quarter of the total outstanding home mortgage debt in the United States. The remaining 75 percent is in prime loans. Unlike subprime loans, prime loans are made to borrowers with good credit, who fully document their income and make traditional down payments. Default rates on prime loans are increasing rapidly, although they remain significantly lower than those on subprime loans. For example, among prime loans made in 2005, 2.2 percent were 60 days or more overdue 12 months after the loan was made (our definition of default). For loans made in 2006, this percentage nearly doubled to 4.2 percent, and for loans made in 2007, it rose by another 20 percent, reaching 4.8 percent. By comparison, the percentage of subprime loans that had defaulted after 12 months was 14.6 percent for loans made in 2005, 20.5 percent for loans made in 2006, and 21.9 percent for loans made in 2007. To put these figures in perspective, among loans originated in 2002 and 2003, the share of prime mortgages that defaulted within 12 months ranged from 1.4 percent to 2.2 percent and the share of defaulting subprime mortgages was less than 7 percent.