The private sector has begun to default on home loans and add fuel to the mortgage crisis with the first broad-based, systemic attempt to prevent foreclosure. Both Bank of America (BAC) and JPMorgan (JPM) are attempting to help hundreds of thousands of troubled homeowners with massive loan modification efforts.

Regulators and bank executives are operating under the assumption that reducing foreclosures will slow record drops in home prices. In turn, this will help stabilize the financial system – and, by extension, the economy as a whole.  Most foreclosures are concentrated in communities that built large developments, using cheap financing to help fuel speculation and massive over-valuation. These areas, especially those where homes were purchased by lower income buyers, are being decimated by delinquencies and repossessions.

What main mortgage insiders are concerned about is the crisis broadening:  More and more delinquencies are being reported in the prime mortgage loan market where borrowers with good credit scores have begun to miss home loan payments with alarming frequency.  The most recent mortgage delinquency data suggested that defaults on subprime mortgage loans are occurring at measured pace than in recent months, good credit homeowners are beginning to show more and more delinquencies

“The increase in prime ARMs foreclosure starts was greater than the combined increase in fixed-rate and ARM subprime loans. Thus the foreclosure start numbers will likely be increasingly focused on by refinancing ARM loans with fixed rate home mortgages.” There is still a wide misconception that only “subprime” people maxed out credit cards, took out loans they couldn’t afford, and were generally reckless with their personal finances.   As the economic slowdown swirls outward into the broader economy, cracks are starting to form in established neighborhoods that have thus far experienced minimal home price depreciation.  FHA home loans continue to dominate the origination for purchase and refinance

As mortgage refinance underwriting requirements have tightened in recent months, home buying has slowed in these more well-to-do areas. This trend is being masked by spikes in the distressed sales driving broad housing market indicators.   As layoffs continue, borrowers in these regions will be forced to sell for the first time in years. The illiquidity in these markets means it will take just a few such sales to readjust prices dramatically downward. Homeowners that don’t sell by choice, particularly if they’ve accumulated equity in their homes, are apt to be less picky about their price.