Could things get worse? Well, according to a piece by Les Christie of CNNMoney.com, the answer may be yes.

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

Here is yet another strong and very expert view who says — you bet: Merrill Lynch’s Chief Investment Strategist Richard Bernstein said that investors are significantly underestimating the risks still associated with the credit crisis and suggested that we are not even close to the end of the problems.

• Traditional Prime Mortgages: The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May 2008, compared with 1.38% a year earlier (May 2007), according to LoanPerformance, a unit of First American, CoreLogic that compiles and analyzes residential mortgage statistics.
•  Jumbo Loans: And it gets worse. 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 2008, compared with 1.11% a year earlier (May 2007). 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.

And now, the latest shoe to drop: Prime loans are just the latest class of mortgages to suffer a spike in failure rates. First were sub-prime mortgages. Next was the Alt-A loans. Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time.

• Home prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index.

• And there’s a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors.

• 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.

More foreclosures, fewer loans: 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.

About 60% of the loan officers surveyed reported that they tightened lending standards for prime mortgages during the first three months of 2008, according to the April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve (see our indepth MarylandCommecialTitle Blog article on this subject), which is released quarterly.

While easy credit fueled the housing boom, restricted credit is certainly contributing to the bust. The question we all want to know is …. when will all this settle?

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