US prime mortgage defaults worsen faster than subprime

By Al Yoon

NEW YORK, Aug 22 (Reuters) - Delinquency rates on many better quality U.S. mortgages last month outpaced those on the subprime loans that helped spark the U.S. housing crisis, Standard & Poor's reports showed on Friday.

Total delinquencies on prime "jumbo" loans and "Alt-A" loans made in 2007 rose at a 7.3 percent and 9.12 percent rate, respectively, from June, the rating company said. These loans require less proof of repayment but were made to borrowers with credit scores above subprime. For subprime loans, the rate of delinquency rose 7.0 percent rate last month.

Overall, delinquencies on 2007 prime jumbo loans rose to 3.22 percent in July, while Alt-A loan delinquencies increased to 14.56 percent, S&P said. Defaults on subprime loans from last year hit 31.25 percent.

The housing slump, now in its third year, has surprised many mortgage companies, such as Freddie Mac, as its effects erode more creditworthy loans. Potential downgrades to such loans, including top-rated ones, have put mortgage bond markets further on edge in recent weeks as they await rating company reviews, investors said.

S&P in late July increased its loss assumptions on many types of mortgages, including doubling the projections for the Alt-A sector. The company aims to complete reviews using its new assumptions "within a few weeks, as opposed to a few months," said Robert Pollsen, an analyst at S&P in New York.

Delinquencies on loans made in 2006 exceed those of 2007, probably because of the longer period from origination.

"The more recent vintages are suffering more performance related issues sooner, and to a greater degree," Pollsen said.

In a positive note for prime jumbo loans, serious delinquencies -- including loans more than 90 days past due, foreclosures and bank-owned real estate -- increased at a slower rate in July, Pollsen said.