Many of us have written volumes on the impending Alt-A Implosion. But, I still don’t think people understand that the Alt-A universe, larger is size than SubPrime, is presently imploding in front of our very eyes. Unlike Subprime loans that were more localized to specific regions of the bubble states or lower priced areas, Alt-A loans cut across all socio-economic boundaries and can be found littering some of the most affluent areas in the nation.
For those of you who think that higher priced regions are ‘isolated’ from price declines just because they have not been beaten as badly as Subprime epicenters yet, this should be a wake up call.
The ‘Alt-A Implosion’ could dwarf the Subprime Implosion when all is said and done. This is because values in higher-priced, heavy Alt-A areas should actually end up being hit harder, as Alt-A loan allowed much more leveraged and much less documentation than Subprime relying mostly on a credit score and an appraisal for loan approval. Within the Alt-A universe is where all of your stated income, no ratio, no doc, 100% piggy-backs can be found. The most notorious Alt-A loan is the Pay Option ARM.
The way all of these loans were structured is producing a very linear mortgage crisis - from Subprime to Alt-A to Jumbo-Prime then Prime. Jumbo Prime is arguably a little less risky than Alt-A but includes much of the same types of loans such as the 5/1 interest Only. Much of this was also stated income, allowed high combined loan-to-values and carried low introductory teaser rates. With values down as much as they are in the Jumbo regions, I would suspect that Jumbo Prime will end up acting much more like Alt-A in the future.
The coming Alt-A and Jumbo Prime Implosions puts at risk well over $1 trillion in residential mortgage loans, much of it sitting on the balance sheets of some of the nations largest banks such as Wells Fargo, Chase, Bank of America and Citi. It will also take out of commission the higher income demographic for a long period of time.
At the very bottom of this post are many links dating back months on just how devastating the Alt-A Implosion will be. This is likely why banks and regulators are so gung-ho on mortgage modifications as of late. None have the balance sheet to manage high double-digit default rates on what they still consider to be ‘high grade’ loans.
Below are highlights from a recent release from Mortgage Daily. -Best Mr Mortgage
