Alt-A Loans Spiraling Downward 19 comments
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I haul out this chart every couple months.
It seems there is always something that makes it relevant again. Yesterday, it was a report from Fitch Ratings that says it expects losses on Alt-A loans to far exceed its earlier downgraded assessment.
As you look at the Fitch commentary, keep in mind that they include both Alt-A loans and Option ARMs in their Alt-A classification.
The rating agency said it now expects average cumulative losses on 2005, 2006 and 2007 vintage Alt-A transactions to hit 2.72, 6.78 and 9.58 percent, respectively, up dramatically from expectations at the agency earlier this year.
Fitch cited a “rapid increase in 60+ day delinquencies experienced over the past six months,” despite servicers’ collective efforts to hold off on actual foreclosure sales — likely implying that a halt to foreclosures is having little effect in resolving borrower delinquencies. Between May and October 2008, Fitch said that 60+ day delinquencies for the 2007 vintage increased from 8.80 percent to 14.65 percent; 2006 and 2005 vintages also experienced steep increases rising from 10.30 percent to 14.24 percent and 6.57 percent to 8.79 percent, respectively.
Now look at the chart and what do you see? Obviously, we aren’t even into the teeth of the resets and recasts for these loans. In fact, the lion’s share of the adjustments isn’t even scheduled to take place until somewhere in 2009 continuing into 2010. So why are they apparently falling apart right now?
You can speculate until the cows come home about why this is falling apart so fast but here are a couple of ideas. I’m sure there are others.
A lot of these loans were used to purchase somewhat upscale to frankly upscale homes by people that had no business buying in that price range. The purchases were facilitated by stated income loans and the only way they could possibly work was for home prices to continue to escalate. When the bubble popped the game was over but the buyers had a bit more in reserve than the subprime borrowers so it just took a little bit longer to work its way through. The reserves are gone and it’s just a matter of time until the foreclosures roll through.
The second thought that occurs to me is that the recession is beginning to bite. The first wave we now see may well be borrowers who were dependent on bubble economics. Real estate agents, mortgage brokers, title companies, bankers, you name it. They started getting hammered by the recession earlier than most and logically are the first to default. They also tended to buy above their means as they believed in the fairy tale. If this is true, then we’re just seeing the tip of the problem.
This may well signal the beginning of a move up the scale in terms of foreclosures. We aren’t to a large degree talking about first time homebuyer types of homes now. The upper end is starting to get hit and that has a whole new host of implications. These homes are not particularly attractive to investors as the price generally is too high for the property to pencil out as a viable rental. Additionally, the dispossessed homeowners are not likely to adapt well to a much lower standard of living. Moving from granite counter tops in a 4000 square foot house to Corian in a tract home is not an easy adjustment.
I expect that this development is going to provide more juice for the loan modification crowd. These borrowers have more political clout and most communities don’t want to see a lot of vacant houses in their signature neighborhoods. The issue, however, is going to be one of scale. To modify these loans in order to keep the occupants in the house is going to require some breathtaking write-downs of principal. Forget lowering interest rates, we are talking about debt forgiveness that will likely be in the hundreds of thousands of dollars per property. That, my friends, is one big political and economic problem.
Every now and then, I think that we may be working our way out of this mortgage morass.
Then something like this pops up. I suspect that I may well pull this old chart out a couple more times before I get to quit writing about this.
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It's just not smart to hold a loan of $400k and another of $70k on a home that won't be worth $470k within the next 5 years (or more).
Take the credit hit... walk away. Save tens of thousands by renting instead of giving the irresponsible banks (who caused this mess) any more $$$.
$1,000,000,000,000 in outstanding ALT-A loans - Most will default if not yet
600,000,000,000 in outstanding Option ARM loans - about to hit deadline.
This on top of the 1 trillion in sub-prime. Andyou see end in sight in next year. Thats foolish talk. Like living in a dream world.
It can be fixed. We can let "primary" homeowners who live in home to stay. One of the reason they are in trouble is the ARM reset. Well the Fed has rates much lower then back then. Now reset to the FED prime and make it for 30 year fixed. No more f....ing with the poor homeowner and public.
Lets make real decisions. Fix real problems with real soutions.
Owners can throw in the keys and walk away and not take a multi-hundred thousand dollar loss and go and rent. Also, when you look at the number of foreclosures, I don't believe defaults or foreclosures on your credit ratings are going to mean all that much in the coming years because of the mass number of them. I don't see the US being a repeat of Japan and homeowners stretching mortgages to 100 years in order to stay in a home they can't afford.
It comes down to the fact that someone has to take the loss and the homeowners can simply walk away. The banks should have been bending over backwards to do loan-mods in order to keep the foreclosures that have been happening thus far from happening in order to get what money they could out of the current owners.
It comes down to the fact that their was a tremendous real estate bubble and the nominal values got way too high because of available credit. The credit is gone and so are the buyers. The truth is out and the supply and demand have to get back to equilibrium. This is going to cause a loss of principle someone will have to take. The important question now is to figure out how to most efficiently do this.
On Dec 16 01:30 PM cadoggy wrote:
> I've known for months that loan mods won't work without serious principal
> write-downs. Borrowers may have dived into this mess without checking
> the depth of the water but now that they're educating themselves
> real quick.
>
> It's just not smart to hold a loan of $400k and another of $70k on
> a home that won't be worth $470k within the next 5 years (or more).
>
>
> Take the credit hit... walk away. Save tens of thousands by renting
> instead of giving the irresponsible banks (who caused this mess)
> any more $$$.
The way it now looks, is that "the someone" who will pay for the loss of principal is the responsible saver. This while we constantly bemoan our low savings rate.
It does not bode well for a market based economy when the connection between production and consumption is destroyed by government policy that allows some to consume in excess of their production at the expense of those who produce in excess of their consumption.
The way it now looks, is that "the someone" who will pay for the loss of principal is the responsible saver. This while we constantly bemoan our low savings rate.
It does not bode well for a market based economy when the connection between production and consumption is destroyed by government policy that allows some to consume in excess of their production at the expense of those who produce in excess of their consumption.
Maybe more precise to note they are going to GO BACK to their former standard of living, having enjoyed several years of living beyond their means. This doesn't really pose a social malcontent problem. I've been wondering lately if many of these people didn't know (perhaps subconsciously) from the start that their stay in the over sized mansion was a temporary condition.
Another chart issue is that it doesn't factor the impending inflation that will rock our economy in 2009-2010. No way around it, the fix is in people. Good for real estate, but bad for $10 milk.
On Dec 16 09:56 AM Pedro222 wrote:
> A significant number of the Option ARMs have a provision for a reset
> if an LTV (based on original value) cap is reached; which happens
> if only the minimum monthly (negatively amortizing) payment is made.
> Most people ended up only making these minimum payments. I don't
> think this effect is fully captured in the CS chart you have, and
> as a result we may be seeing far more "Alt-A" (in the broader -Fitch-
> sense) resets than anticipated.
Agreed on a monetary/nominal basis. However, looking at the oversupply and tightened lending standards, do you think the increase in the value of homes will keep pace with inflation to give you a real return, not just a nominal one?
Agreed on a monetary/nominal basis. However, looking at the oversupply and tightened lending standards, do you think the increase in the value of homes will keep pace with inflation to give you a real return, not just a nominal one?
Agreed on a monetary/nominal basis. However, looking at the oversupply and tightened lending standards, do you think the increase in the value of homes will keep pace with inflation to give you a real return, not just a nominal one?
The lending distortions of the past that created the bubble in housing are now gone. It is no longer enough to say that you make $150,000 - you need to prove it. It is no longer possible to get 100% financing with poor credit. The poor lending decisions of the past are causing pain for both borrowers, banks and the economy at large, but ower rates alone will not clear the market.
The free market has solutions to over leverage and poor lending decisions. The solutions are called write offs, bankruptcy and foreclosure. As painful as these measures are, they are the mechanism for building a financially strong base of homeowners who will be far less likely to default on their mortgages.
During the height of the housing bubble several years back, only 10% of California households qualified for a conventional 30 year fixed rate mortgage. The bubble prices were nurtured and sustained by exotic lending programs with no income verification. Fast food workers bought $1,000,000 homes. Now the bubble has burst.
Priced properly, houses will sell. Time and price will accomplish what the Fed cannot. There are oceans of private money looking for an adequate return on capital. Let the free markets do their work - and the pain of the housing bust will soon be solved.
> Sickofthehype said "Another chart issue is that it doesn't factor
> the impending inflation that will rock our economy in 2009-2010.
> No way around it, the fix is in people. Good for real estate, but
> bad for $10 milk."
>
> Agreed on a monetary/nominal basis. However, looking at the oversupply
> and tightened lending standards, do you think the increase in the
> value of homes will keep pace with inflation to give you a real return,
> not just a nominal one?
Even if increases in nominal housing values doesn't quite keep up with the inflation rate it would have a tendency to help the banks &/or underwater homeowners.
Someone earlier used an example of a home purchased at $500,000 now at $400,000 market value and a loan of $470,000. If we had 12% or 15% inflation and homes went up 10% their market value would suddenly be much closer to the mortgage amount and heading in a good direction as far as they are concerned. A second year with inflation like that and they would be up to a $480,000 market value and some actual equity in their home. If incomes were also rising they would also be in better shape to keep up with the payments, of course.
In an inflationary environment people would be less likely to walk away from their homes and banks would probably take less of a financial hit if they did. In fact they might even prefer it if the borrower had a long term fixed rate that was below the new current market rate which would be quite likely.
It would be the start of the next bubble...