For the last year we've been dealing with the fallout from sub-prime mortgages. Sub-price were mortgages that were identified on the front side for their risk, but the loans were made anyway. 100% defaulting loans and declining property values left many homeowners, and real estate professionals running for cover. The takeover or Fannie Mae and Freddie Mac has some believing that lower rates will start to pull us out of the dilemma we are in. Maybe it will, and maybe not. Fannie and Freddie both have exposure to Alt-A loans and Fannie Mae has already announced it won't accept any new Alt-A loans after Dec. 31. I came across a story the other day that I bookmarked. It was one of the most read stories on Bloomberg the other day. It has to do with Alt-A Loans starting to default. It is a must read.
"Alt-A Mortgages Next Risk for Housing Market as Defaults Surge"By Dan Levy and Bob Ivry - Sept. 12 (Bloomberg)
Alt-A Loans are also called "Liar Loans!" They are used to provide mortgages for self employed individuals. They can also be stated income loans. Last summer when the mortgage markets started to unwind, everyone tried to calm the markets about Alt-A loans. "Safe loans, and no problems here" was the mantra...until now. There are over 3 million Alt-A loans outstanding and account for over 1 Trillion dollars in loans as compared to the 855 Billion in Sub-prime loans. 16% of the Alt-A loans are now 60 days late in payment. Defaults will increase in these loans until 2011 as these loans now start to hit their adjustment periods. Teaser rates are now due to readjust the rates which will place payments of many of these home mortgages beyond the ability of the homeowners to repay them. Declining home values also place in question the ability of the homeowners to refinance the loans. Tighten the seat-belts the ride gets more interesting from here.
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Jim,
Thanks for the post. I have heard rumblings about the Alt A product leading in volume and potential being a serious problem when it comes defaults. We are preparing for the default numbers for the end of this quarter and based upon estimates, the numbers aren't going to be encouraging.
Jim: Never heard of Alt-A loans, well I've heard of the loan, just never heard it called Alt-A. I always learn so much from your posts. Makes sense that those will be next given the state of the economy. Self-employed individuals struggle as it is, let alone when there's a slowdown affecting just about everyone.
And the beat goes on. I recall when I got e-mail from a loan officer with Chase to introduce me to the Alt-A product. I believe it was sometime in 2004????
I am fortunate that my buyers got conventional or FHA loans.
Jim...
I never understood the concept of a stated income loan, and the investors that bought into this should not be surprised if the loans go belly-up!
Jim, WAMU and Wachovia alone have over 20 billion by themselves......The numbers look like they could drag an additonal 1 trillion and that does not bode well for any type of recovery happening for another 3 to even 4 years. I have read 3 different forecasts (Case Shiller, John Burns and John Mauldin) 900,000 sales per month around 2012.....ouch. We are doing the right thing.....stay educated and instead of react, proact. You , me and many others will be okay.
Good post, thanks for the info
Bo
Jim,
Great post - it is scary out there. The "Alt-A" loans are certainly the next shoe to drop per se. Is rough seas but we will all make it through !
William Collins, Broker Associate (ERA Queen City Realty) It is part of the job. Like I said we need to tighten our seatbelts the ride is going to get a lot more interesting from here.
Donna Yates, Georgia Realtor North Georgia Blue Ridge Real Estate (Mountain Investments of North Georgia) Sometimes these Alt-A loans were referred to as no or low docs, and can also be non conforming jumbos. They were meant for the self employed, the business owner, the independent sub-contractor, employess that get a lot of bonus money, or entrepreneurs. These could be big buck homes! This is going to be interesting.
Lenn Harley, Homefinders.com, MD & VA Real Estate I believe you are right. I think they've been around for a while, but until recent times were never dispensed this freely. The pseudonym is just one of many for the same product. I believe the Alt-A and liars loans were lending industry names for the product. I would have called them no or low docs, or even no income verification loans.
GITA BANTWAL, REALTOR BUCKS COUNTY, PA HOMES (ReMax Centre Realtors) You are very fortunate. Since Atlanta was always an entrepreneur town these loans were very common here.
Richard Weisser, Associate Broker, E-Pro ERA United Realty, Auctioneer, CE Author (Coweta Fayette Real Estate, Inc. ERA United Realty) Well this is the type of product a lot of real estate agents would use if they were buying on their own behalf. In the last few years they really over did the use of this product.
Bo Hussung/ Title services in all 50 states (Cogent Closing Associates) Bo, you are so right! We must understand what we are dealing with. We will survive if we know how to prepare for the storm.
Christopher and Stephanie Somers - Realtors - Philadelphia Real Estate (RE/MAX Affiliates) You know the ads we see on late night TV, Girls gone wild? Well we are not used to banks and lenders gone wild. They lent money like drunken sailors on shore leave.
Jim,
Fannie Mae and Freddie Mac were already having trouble before general Alt-A problems surfaced, but looks like they had a larger than previously known exposure to them and that might be the core reason to their sudden takeover.
Jim I think to many people held to the slogan real estate always goes up.
Esko Kiuru - Las Vegas NV Mortgage Consultant (Sinifox Financial) I agree. Something triggered the quick rush to take them over.
John Walters (Specialized Real Estate) John I agree, but what goes up...can come down.
The exposure to Alt A loan defaults is real serious. The thing is even within the Alt A category there are numerous types. I would like to know how the delinquency break down is, within Alt A.
There are many strong self employed.
There are some risky high LTV investor loans, even high LTV state investor.
There are all the No Doc loans.
Then, there are all the pay options, with neg amortization.
Plenty variety of loan types within the Alt A category.
Boy, it sure rose and fell quickly, and they are taking Fannie and Freddie down.
About 1 month ago, I did not even realize they were so heavily invested in Alt A. They jumped in right about the time Alt A started failing. They did not even get to enjoy the "good times."
Richard
Richard Smith Mortgages Home Loans FHA TN GA AL (American Acceptance Mortgage, Inc) There was a time just last summer when everyone said no problem. Just like they did with sub-prime. Remember how everyone was reassured "No problem!" Now look at it! Incredible.
Jim, I hope this chart doesn't scare you too much. The end of 2008 will be just the beginning of the resets for Alt A and option ARMS.
Tim Maitski~editor of MaitskiREport.com (HomeAtlanta.com) I've seen the chart before, but it is a great visual that we are not even into the worse of this yet.
Jim,
Great post. We're already seen an increase in Alt-A defaults here in Florida and Michigan.
Steve
www.mfi-miami.com
The pay-option resets are on the horizon, Jim, and a horror story in the works. I can see Vincent Price as the lender in a movie entitled, "Blood on the Roof". It's almost too incredible to believe that this kind of thing has happened. Hope you have a great week. Fine post.
Steve Dibert (MFI-Miami) Thanks! It is amazing how they want to keep the realities of the market under wraps until after the election.
David Saks - Real Estate Broker (The Real Estate Mart of Tennessee, Inc.) Thanks David!