More borrowers with good credit are defaulting

Past due stamped on envelope

The Mortgage Bankers Association says 3.07% of prime mortgages -- those given to borrowers with good credit -- were in foreclosure or at least 60 days late in the second quarter of 2008.

That easily tops the previous record of 1.97% set in 1985.

The situation is particularly bad in California, where home prices have fallen more than 40%.

About 4.15% of prime loans in the state are considered seriously delinquent. That's far more than the high point of 2.6% reached during recessions in the 1980s and 1990s.

Still, that's certainly nowhere near the default rate for subprime mortgages, the high-risk loans tapped heavily during the housing boom by borrowers with the worst credit, the most debt and no money for down payments.

In August, more than 43% of subprime loans nationally were in foreclosure or at least 60 days behind with their payments, according to First American CoreLogic.

But the increasing problem with prime loans shows how complacent lenders were on all types of loans in the early 2000s, according to Christopher Thornberg, founder of consulting firm Beacon Economics in Los Angeles.

Banks and mortgage companies did little to qualify borrowers beyond checking a few facts on their computers.

" 'Prime' lost a lot of meaning in the insanity of the last few years," Thornberg told the Los Angeles Times.

With home prices declining in four out every five markets, many borrowers owe more than their homes are worth.

Falling home prices wiped out any equity they might have had to fall back on when they run into financial trouble.

The loss of a job is the main reason prime borrowers default, and with the economy almost certainly in the midst of a serious recession, more homeowners with good credit are going to find themselves out of work and unable to pay their mortgages.