The Coming Alt-A Crisis

Posted under Foreclosures, Housing Bubble, Recession, Statistics by Darren Hom

I ran into this video posted at short sale expert Cory Boatright’s blog. It’s about the coming Alt-A debacle:

Mr. Mortgage: Here Comes the Alt-A Crisis

This is what Cory wrote in response to the video:

There is a crisis that taking place right now of which very few are even aware. It is called the “Alt A” crisis. What is Alt-A crisis?

Here are some hints:

• It is 50% bigger than subprime loan types and growing larger!
• It has an over 14% default rate with higher than a 700 average borrowers’ credit score/FICO
• It is going to be much larger than the subprime crisis
• It involves many exotic loans
• Many of the loans balances will go up significantly, thus creating even more defaults. Take a look at this Web page: New York Fed: Nonprime Mortgage Conditions in
  the United States

Bottom line: Negative equity is a huge contributor to loan default. It will make the subprime crisis look like a baby.

I recommend that you check out Mr. Mortgage’s Blog/Web site and subscribe to his RSS Feed.

Here’s the comment I wrote on Cory’s blog:

Thanks for posting that, Cory. I ran into the same video from another source. It seems that many of the experienced investors are talking about how bad Alt-A is going to be, but this sort of thing never seems to hit popular media until after it becomes a big problem.

IMF Mortgage Reset Chart

Alt-A [and option ARM] resets will peak in 2011. Things will remain bad for quite a while. Bad for everyone else, that is, and good for those who help bring liquidity to the markets through short sales, REO purchases, and note purchases.

Addition: It typically takes about six months after an adjustable-rate mortgage resets for the bank to repossesses the property. It may then take another six months for the property to sell and six more months before the property is no longer used as a comp to lower the values of the houses around it.

There’s a year and a half between an ARM re-set and the time when the house is no longer used as a comp. The fallout from the mortgage crisis is going to be around for a couple of years.

The Fed currently isn’t doing much to “save” the markets. The swaps for T-bills aren’t inflationary (yet), since the assets have to be swapped back every 28 days. I think swaps will become inflationary when the paper stops performing while it’s being held by the Fed.

I think Bernanke is more concerned about the value of the dollar than he is with bailing out the markets. I’ve written about this before:

The Fed Is Not Inflating

Will the Fed Bail Us Out?

Please comment with your own thoughts on the mortgage crisis.