The Second Wave

[TJ_98370]

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The following link is a Sixty Minutes feature, video and transcript. There are no surprising revelations for bubbleheads, but for those who think the real estate market is nearing the bottom, they may want to rethink their position. Seattle is not immune to national trends.
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......"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized." ----- Whitney Tilson, investment fund manager
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[mukoh]

TJ,
Talk about overthinking and overanalyzing took a whole 2 minutes to read through the article to discover that WHOLY WOW, the analyst so talented as to discover this thing called Alt-a and OptionA, is the next Warren.

This topic has been beat to death for a year now.
Anything new?

[TJ_98370]

mukoh,
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As indicated in my original post, there is nothing new here for dedicated bubbleheads. However, it is apparent the MSM doesn't think the subject has been "beat to death", which is an interesting point to be considered all by itself. Also, perhaps there are others that visit this site that have not yet acquired your expansive backgound knowledge and insight?
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[mukoh]

The AltA loans have been discussed from CNN to WSJ, and even Fox for months. 60 Minutes brings out an analyst from a lower tier firm with a "NEW" reveleation. Thats what is funny about it. Much as TVs were rolling ratings on "NEW" reveleations on how to make money on real estate now they are doing the same with these "NEW" reveleations on losses. Every analyst that takes AltA loans from 2005/06/07 happens to miss the amount of them which have either already gone back/refinanced already.

And the cleverness of all this also separates sub-prime and AltA/Option loans. I have not seen a single buyer PN/Deed through county that was sub-prime and a 30yr fixed. They were all AltA/OA.

[EconE]

[TJ_98370]

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According to the graphs posted at this Calculated Risk posting (see below), active subprime ARM rate changes peaked in Sept 2008. Active Alt-A ARM rate changes peak in Nov 2009. Given that Alt-A people (who are not sub-prime by definition) are defaulting on their teaser rates right now (which will eventually result in increased foreclosures), the supposition that we are a long ways yet from seeing the bottom in the real estate market has a lot of credibility . We are not going to see bottom until sometime after the beginning of 2010.
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[deejayoh]

Looks like the bulk of the resets are in late-2009/early-2010

Given that most of these loans are 5 year ARMs, that means they were made in 2004/2005

Interesting to compare this with the who are under water by vintage of mortgage

Purchase Year Median Owner Equity Median Owner Equity (Pct) Median Down Payment (Pct) Buyers With Negative Equity (Pct)
2003 $70,137 42.2% 10.1% 7.7%
2004 $44,320 25.5% 10.0% 18.4%
2005 $16,580 9.0% 10.0% 37.4%
2006 $6,292 3.4% 10.0% 44.8%
2007 $12,182 6.6% 10.0% 37.9%
2008 $34,449 19.0% 10.0% 16.9%

Between 2004/2005 it averages about 28% of homeowners who have negative equity - so if the Alt-A borrower equity distribution looks similar to the overall US distribution - we would be talking about slightly more than 1 in 4 of these borrowers who would have trouble refinancing before their reset because they are underwater. But just over 70% could refinance.

Alt-A distribution is probably worse than the average - and eyeballing some of the likely Alt-A "Centers" like LA and SF the split looks more like 40/60 for underwater/have equity. So its bad, but as Mukoh pointed out many of these buyers probably can refinance

[Tejas]

[jon]

What is the bump in payment that the alt-As will be facing? With 5 years of salary growth since they got the mortgage it seems like they should be able to handle a switch from IO to amortized. Although they will be underwater, I would expect many in that group to be less willing to go into foreclosure than the sub-prime people and will try to ride it out for longer.

As for the banks, when someone who is 10% underwater wants to refinance calls up, they can either agree to extend the IO payments and they both win, or they can force the house onto the market and a new buyer will come back with a 30% smaller mortgage at a lower rate.

[deejayoh]

[TJ_98370]

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DJO,
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I think you hit on something that causes confusion when discussing these type issues. The term "Alt-A" is used rather loosely. The term "Alt-A" is sometimes used to indicate a categorization of borrower and sometimes it is used as a type of loan.
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It appears there is some confusion in many corners of the mortgage banking world about Alt-A lending. For the sake of clarification, let's define what Alt-A lending is by eliminating what it is not.
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Alt-A lending isn't synonymous with making a loan to a borrower with impaired credit. Simply put, Alt-A lending is all about making a loan to someone whose application metrics don't necessarily fit inside an investor's guidelines. This doesn't necessarily mean that the borrower is a greater risk to a lender than another borrower whose financial situation does fit inside lending guidelines.....
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[rose-colored-coolaid]

[jon]

[rose-colored-coolaid]

[Charles Dean]

For an definition between subprime and Alt-A, think of it this way:

The subprime borrowers were the borrowers who previously would've only been able to qualify for FHA, if at all. Most subprime loans were I/O loans, done as 80/20's for borrowers with sub-660 credit scores. Most subprime loans were also 2 or 3 year ARM's.

Those will be done resetting next month for the most part. Almost all subprime lenders went out of business in December and January 2 years ago.

Now for Alt-A, your typical borrower was a +660 FICO borrower, but usually had some issue that would keep them from qualifying for normal conventional prime financing. Usually a stated income loan with verified assets, I/O, maybe an option ARM.

However, the majority of Alt-A borrowers took out 5 year ARM's or better. So those 5 year ARM resets on Alt-A loans will be spread out over the next 3 years.

Alt-A vs. subprime was really just industry jargon. Subprime was basically the loans to people who would've never qualified before and shouldn't have been given anything but an FHA insured loan. Alt-A was for people who could've qualified, but not without jumping thru some hoops or having a decent down payment and more than likely would've ended up getting an FHA loan for their first purchase of a home.