Prime

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The prime rate on mortgages and other loans is the lowest interest rate lenders will charge to borrowers with the lowest repayment risk. Although previously though a safe investment, prime mortgages in the U.S. are now defaulting at a higher rate than subprime mortgage holders in late 2007.

Lowest wins

Among major U.S. banks the prime rate benchmark is considered to be the Wall Street Journal Prime Rate (WSJPrime Rate), which is taken from a survey of the 30 largest banks' lowest available interest rates on corporate loans.[1] Those rates, and hence the WSJ Prime Rate, generally only move with changes in the Federal Funds Rate and Federal Disocunt Rate set by the U.S. Federal Reserve Bank.

On the since-stagnant credit markets, prime mortgages referred to home loans of sufficient quality that they could were considered eligible for securitization by now-bankrupt mortgage-repurchase giants Fannie Mae and Freddie Mac for sale to the [[secondary market]][2] - where liquidity quickly dried up in mid-2007. Subprime mortgage lending, by contrast, focuses on customers whose credit history doesn't qualify them for the prime rate.

Prime cut

Although lenders previously considered prime borrowers a good investment, U.S default rates for prime mortgage-holders have recently become a benchmark for the broadening impact of the credit crisis. The national prime default rate recently shot to 3.07% in Q2 2008, way over the previous record of 1.97% in 1985.[3] In the embattled Californian housing market the rate of 'seriously delinquent' prime mortages jumped to 4.15% in the same period.

References

  1. Wall Street Journal Prime Rate. TradersLog.com.
  2. Prime Mortgage. Answers.com.
  3. Foreclosures, delinquencies skyrocketing among 'prime' borrowers. L.A. Times.