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Add to that this headline from Calculated Risk today:

Link to CR article

The article reports the rising delinquency rate in Alt-A loans.

I don't think there is any way to accurately predict how many homeowners will walk - those who haven't reset yet can read the writing on the wall, and I'm sure are bailing prior to resetting.

Look for the downturn to increase in speed as a result, as long as the banks can keep up.

That or lending practices will be restructured to allow people to refinance the Alt-A ARMS before 2 years time.

I have an Alt-A ARM on a property that resets in 2010. Our strategy is to take advantage of the higher conforming loan limits by the end of the year. We, and I'm sure many others, are watching mortgage rates. If oil stabilizes and the stock market continues its' slide, rates should be coming down slightly, not up. However, rates could still skyrocket and a war involving an oil country would blow everything up. Strange times.

Interesting point there, Mozart - can the lending industry re-structure? The current bill in Congress is talking about cutting the loan amounts back to 85% of today's home value - that isn't going to sound too appetizing to the lenders.

But how else can you get the payments down low enough so they are affordable to the existing homeowner?

Another choice is to suspend resets altogether, but you don't hear anyone talking about that.

While we are on it, I'll mention this again. The World Savings neg-ams are less likely to hit early resets than WaMu's or Countrywide. World never tweaked the reset terms, they kept them at 10 years or 125% of the balance, which ever came first. It takes five or so years before they hit the 125%.

That won't save the world, but somewhere under 100% of these Alt-A loans will get foreclosed.

wow. just wow.

over on housingwire, they are saying that 70% of ARMS are delinquent before reset. that means if 70% of subprime/alt-a are ARMS, 600k REOs before reset in CA alone.

tidal wave coming our way.

I normally agree with most everything you write gym, but I disagree with your stance on why people are Alt-A. The average FICO is good, but $100K in income with a 709 FICO does not mean you can afford a $1MM mortgage. That is why the loans are Alt-A not b/c of greed of repackaging.

Further I know you think the 125% Option-ARM is the way to go, but honestly what does this solve? It just postpones the problem. When the payments finally resets it will be even larger, right? You have pointed out baby boomers will be selling homes, so does the longer reset mean they will be able to refinance in 2012 or 2015 easier. I have talked to mortgage brokers (the few honest ones) who asked people not to take Neg-ams, but the response was, "That is all I can afford and that is all I want".

In other words, if people could have afforded the home or the lifestyle that pushed them to refinance even with a neg-am mortgage they could make the 30 year payment and avoid any trouble.

Does this make you change your philosophy on the 125% ARM?

Sorry I meant Jim not gym

I think there were tons of people stretching to buy homes they couldn't dream to actually afford, using option-pay loans to squeeze out the monthly payment, waiting to make their killing in the rising real estate market. Now that is has become clear that the homes have lost value beyond any hope of recovery, people bail. Or buy & bail.

No, to answer the previous question.

I never sold anyone a home for a million dolalrs who made $100K. My point was that Alt-A provides easier underwriting - for people to assume that everyone with an Alt-A loan automatically can't afford it is incorrect.

I mixed in World's 125% cap because of the press they've received this week about bring in outside help to analyze the books. I don't know if they know what they have, and it probably won't matter.

It's coming down to this:

Homeowners who have a loan balance above their present value are walking, regardless of terms. Reset caps don't matter, short sales don't matter, and the government's bag of tricks don't matter.

If homeowners think they are underwater, and have trouble affording today's payment, they appear to be bailing out in record numbers.

Mozart: Higher conforming limits are here now.. why wait?

Rate resets aren't the cause of foreclosures (unless it is strictly teaser rate to normal rate) right now, the majority of foreclosures haven't hit their rate reset yet and servicers are being very proactive about giving relief in that area. People are in homes they can't afford and that is causing the foreclosure issue.

My question is how many of the Alt-A , no doc loans were taken out by RE agents, loan officers and construction folk? At the time I am sure the payment was affordable. But even without an adjustment, if your income decreases or is cut all together, how do you make the payment. The resets will have some impact in the future, but I think the loss of income will have a more immediate effect.

Curious if the default rate on 30 year fixed is climbing at all. . .even for people who put down 10% in 2005 or 2006, they could be underwater quite a bit - if layoffs hit, even fixed rate people could walk.

QuangTran- We're hoping for rates to get below 6% even briefly this year. At that point we'll jump. Don't know if that will happen though. This week the yield on the 10 year bond has been dropping while the stock market is getting slammed.

I also disagree with you on why people are bailing on their homes. I think Jim has it right in that these are people who look at the value of their property as their ARM's reset, (might not be a home they live in),compare it to what they owe and figure they are not real estate developers and let it go. They call it a mistake and say goodbye to owning ever again.

I think those who stick this out will be in a stronger position than those that walk away. Another few years and we'll hear about the affordability crisis again.

I sit here and must just say Wow. I thought it would get bad -- heck I grew up in Denver and saw the regional bust of the late 1980's but now I think the whole country will be much worse off than Denver ever was in the late 1980's.

Jim you say you feel people who have a home value less than the PV of their loan are walking away but over at Calculated risk they seem to say there is no evidence. Are you seeing something first hand and locally in SD that supports this view? If so any way to quantify -- as that would indeed be big news.

Personally I just think we are seeing people default who have finally run out of options meaning draining savings, maxing credit cards and draining 401k plans (a very bad idea but I know of at least one couple doing this). If it is now spread to people who can pay but don't want to -- watch out below.

And lets pray there is not some event in the Middle East -- or I will bet we will see $300 barrel oil and definitely a recession (and I'll bet a draft as well).

Not good times for many.

I want housing prices to fall but I don't want it so bad that the entire country goes through a very bad economic and political decade.

No first-hand view or evidence, but if 21% of Alt-A borrowers from 2006 are 60+ days late and they aren't close to resetting, there must be walkaways.

The neg-am payments are very comfortable, and the interest-only payments haven't changed yet - they are the same as they were day one.

Yet 21% are late? Must be either walkaways or those who have had a big drop in income: realtors, mortgage reps, escrow & title, contractors, etc. I guess there could be 20% right there if we added them up. I know everytime I look at the foreclosure rolls I see at least 1-2 realtors I know on there.

I heard yesterfay that LandAmerica in SD is down-sizing their whole operation into one office. They had bought a handful of other title companies and their affliated escrow divisions: Southland, Lawyer's, etc.

Curious if the default rate on 30 year fixed is climbing at all. . .even for people who put down 10% in 2005 or 2006, they could be underwater quite a bit - if layoffs hit, even fixed rate people could walk.

June 26, 2008 | Mark in San Diego

I am curious too. How will this housing crisis affect the 30 year fixed, full doc loan home owners who bought in the last 5 years?

If they start to walk, then this goes from a once in a life time housing depression to a end of civilization depression.

At some point, there won't be any loans available because it wouldn't make financial sense for a lender to lend on the collateral (home). If I were a mortgage lender, I wouldn't lend on anything more than 50% LTV of a conservative appraisal of the wholesale price.

What would happen to home prices if there were NO loans and buyers had to pay CASH during a depression???

Just anecdotal, but most people I know with ARMs simply have trouble paying them. This is what my friends have in common:
1) This is their first home purchase.
2) They couldn't afford a home without an ARM.
3) They can barely afford their home with an ARM - they left no margin of safety but didn't really appreciate how close they were until now.
4) Their incomes have actually increased every year with some unlikely windfalls (class action lawsuit, bonuses, etc..), and but for that they'd be late on their payments today.

The bottom line is they bought houses they couldn't afford, even by ARM standards. When you buy a house, you make estimates and you think "I can afford this house plus a few hundred extra a month if I use an ARM" which is the first warning flag. Because they don't account for their car breaking down, going to the doctor, fixing their house, the fact that they aren't paid exactly the same day as their taxes and HOA are due. And the way they were signing people up at the bank, they didn't have to care about that. After all, houses were "probably" going up in value so worst off you sell the house, right?

My point was that Alt-A provides easier underwriting - for people to assume that everyone with an Alt-A loan automatically can't afford it is incorrect.
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Here's how I see it...for the borrower, Alt-As are more expensive than fully-documented loans. The only extra "work" a borrower has to do in order to save all that money is produce bank statements, pay stubs and tax returns. I can easily round that stuff up in 15-30 minutes, max.

Additionally, why would a well-qualified borrower get an ARM when rates are at historic lows? Doesn't make sense, unless they are NOT able to really afford the loan (fully-amortized, fixed payments).

Our FICO score is in the 800 range. All that means is that we pay our bills on time. We are no more qualified to buy a $3MM house than a strawberry picker. The whole notion that a lender could "qualify" people for large mortgages based on FICO scores alone, is one of the biggest mistakes of the housing/credit bubble.

If I'm Bank of America, I stop foreclosing, and I tell Countrywide to stop foreclosing. I stop listing REOs. I tell the other banks I'm doing it to save my ass and they should do the same. And then I wait.

For the mother of all bailouts from the federal government.

I don't see any other way this ends.

Before the bubble, people with bad credit and no savings rented.

Then someone spiked the punch and everyone with a pulse got any loans they wanted and there was a bubble. People with bad credit with no money down believed they were "homeowners."

Now the bubble pops, people with bad credit and no savings walk. Investors buy the property from the banks at 40% less and rent it out.

So people with bad credit and no savings are renters again as if the bubble never happened.

And all the marginal realtors, mortgage brokers, and appraisers are back to doing the same jobs they were doing before the bubble. The good ones are surviving and may thrive as the marginal ones leave the business.

Why a bailout ? This is just a return to normalcy. This is just a normal business cycle.

After all, if any Johnny Come Lately can buy a home in La Jolla, then the rich people don't want to live there anymore. Something needs to be done about that. A good old fashioned recession and tighter loan standards will fix everything.

Any bailout will have negative long term impact on people willing to lend money in the future for mortgages so a massive bailout will not help stop price declines long term as the people with money to lend will demand higher rates and higher LTVs which will depress prices.
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CA renter,

I covered that, didn't I?

The rates weren't different, they were offering convenience.

The loans weren't different either, you could get a fixed-rate loan too. Why do people opt for a 5 or 10-year interest-only loan, instead of a 30-year? I'll guess that most probably couldn't afford more, but many of those that could, didn't think in the moment of deciding that their loan might have to last them forever.

It's only now that people are seeing that refinancing later might not be an option, even if you do qualify - you need an appraisal too.

Ca Renter I completely agree. Even if the rates for low doc loans were near full doc they are still not the same. The expense of .25% on 500K is still $1,250.

Simply said people do not throw that kind of money away to save one week of time.

Jim you called it greed by not offering 125% notes. I call it greed offering that much. It gave them an opportunity to earn much more interest and make there books look better for a longer amount of time. Now Wachovia is backtracking and will eventually admit they lost more money on 125% than CFC lost on 110% (But the greed was they thought they would make more at 125%)

I have met people who are just walking away. Some people buy a house at a lower price before walking away while others just walk away. Lets not forget the North County coast has been relatively "immune" when that changes you will see even more walk aways, since trading for a place in Carlsbad for the same price you paid for Del Sur four years earlier will be too tempting.

The history lesson from 2004. Qualify for whatever mortgage you can then you flip the property for a nicer property.

Even the people with large downpayments often could not afford the new home they were buying, but an 10% increase on $1MM is more than a 10% increase on $500K.

Risk models were based on home prices increasing which were based on employment (not even wages just employment). So it was incorrectly assumed there was no incremental risk on low income (unqualified) borrowers

PS Did you see Chuck Smiar changed his tune and actually said it was inevitable for the falling prices to not hit the coast.

FWIW, I am not sure anything meaningful in terms of predicting foreclosures or anything else can be derived just by looking at the volume of "Alt-As" that were created. I wonder how that data is created anyway since there appears to be no real universal definition of what an Alt A is. Like Jim suggests, the common charachteristics seem to be low documentation and automated underwriting, but it seems that the concept of "Alt A" evolved somewhat differently from lender to lender, program to program, and underwriter to underwriter.

During the boom, there were many lazy brokers who put otherwise full doc folks into Alt As just because it was less work than a full doc loan.

There is a huge difference between an Alt-A which was 100% CLTV financing and an Alt-A which was 50% LTV financing.

Some Alt As were fixed although most probably were variables with teasers or option arms.

So Jim, what does Clayton Holdings mean when they base their chart on "active loan count as of February 2008? How did they obtain this data if you know?

I used to be cynical, but these days I am mostly just amazed about the numbers and charts that folks like to throw out there these days. What is the old saying, "statistics don't lie, but if you torture them enough, they will confess".

I read that many "investors" used alt-A financing for their second/third/etc house purchase, while their primary was a prime.

Is this not true?

I found so much to disagree with in the post and first five comments I couldn't read all the way down. So I'll just rebut two thing said and crawl back in my hole.

1)Alt means lower standards. Jim you wouldn't need lower standards, also known as easier qualification if the people could qualify under the old standard. Thats just nuts, people will light their balls on fire to save a few bucks. Nobody blows thousands just to make a mortgage easier to get. If they do, I got a bridge in Brooklyn to sell them.

2) Stock market stabilize?!? Oil come down! Wow that just goes beyond fantasia. Holy crap people are you not paying attention? We haven't even gotten to the point where the rate of descent has stopped accelerating. Dear lard, I want what you guys are smoking.

I didn't make money shorting the homies because I was lucky but because I could smell the deflation in the morning. With that kind of thinking, hell you might as well go long Wamu and Citi.

OK, so I won't call them Alt loans. I'll call them Angelo's loans.

It's how they did it at Countrywide - the phone conversation went like this:

Loan Rep: "Hi, what's your credit score?"

Borrower: "720"

Loan Rep: "You're approved."

When those same borrowers went to shop the rate and terms around, they almost always stayed with Countrywide - the rates were market rates.

If the loan rep doesn't need any other information, and you got the best rate amd terms why wouldn't the most quailified borrowers do business there? I know the people I sent there appreciated the ease and convenience.

But it was different back in 2002-2004. There was a better spread between the rates, a gap that has narrowed since. The popular loan program was the 10-yr I/O, which was 1/2% to 3/4% lower than the 30-year rate. Let's look at a conforming loan amount of $322,000.

On a 30-yr fixed @ 6.50% it's $2,035 per mo.

On a 10-yr int. only @ 5.75%, it's $1,543 per mo.

If you were already somewhat giddy about buying a house because the market was so hot, and in the moment you felt like 10 years was a long ways off, and you could choose to save $492 per month, even the best-qualified people were taking the 10-year I/O.

Today the I/O loans have as high, or higher rates, and nobody's interested.

I'll stop calling them Alt's - they're Angelo's.

How they were able to sell Angelo's loans to Deutsche, HSBC, Bank of New York, and US Bank?? You got me, but it may have been by selling the yield as a 30-year return. I would think that those banks would be much more excited about buying paper that were predicted to return 7%, 8%, or 9%, which could have been the overall yield using a higher rate for the remaining 20 years (after the initial I/O start rate).

If you have some extra bridges laying around, those banks would be the ones to talk to.

"people will light their balls on fire to save a few bucks"

I'm not so sure. But, light someone else's balls on fire??? Absolutely. Anything to save a few bucks.

hi

I think even with alt-a guideline if the loan was affordable for the real income, there would be no problem.

I mean , 200K loan for 60K real income. But there was no home for that price.

Then, they were told to go for loans with teaser rates and were assured that they can refinance before reset.

with confirmed knowledge that "real estate only goes up" , the loaners were sure of that and they accepted it.

When the loans reset, payment are higher , both due to -ve amort and higher rates.

There was another thought process. people who did not have money to buy bigger homes bought smaller ones or bought in farther locations or bought condos/smaller homes/ or crappy locations.

These guys also bought with ARMS (no teaser) because they were sure to upgrade with in 5 years to their dream location. Why waste money ? so even though they saved very little due to ARMS , they went for ARMS. Now when it comes to refinance, the rate is higher. Also they can afford the higher payments. But the problem is that they cannot follow their dream to go to their next step as per their plan as they are upside down.

Some of these people are going to walk away, even when they have the income to afford loan rate reset (with out -ve amortization).

Some of these people see that their friends , "bubble heads" are renting for a much smaller rent than their mortgage. even though they laughed at the bubble heads then( 2-5 years ago),

well, some others loose their jobs, or the total income they depended was both spouses having employment/income. if there is a dip in that due to lay off of low commissions, they have no interest in continuing their payment. Any way, they opted for this home/condo as a stepping stone and have no interest in continuing with it

Actually Jim they didn't sell those loans as 30 year loans. Most of the loans (from my understanding) had early repayment penalties. That meant that the person either had to live with a projected higher rate or pay the fees to get out of the loan. Those fees were what attracted Wall St. They assumed that given a historically normative default rate + the high fees of refinance, or the high rate of the adjusted ARM they were going to make far above the current (at the time) market returns.

It really brings home how evil the Fed's lowering of interest rates post dot bomb bust was. People including Wall St were so desperate for return, that they'd buy anything that hit the number, no matter how risky.

Anecdotal evidence about walking away:

Relative #1 is a young whippersnapper RE agent who purchased with 80/20 financing in early 2007 through Countryside - some sort of Alt-A loans. Kid's approx. 740 FICO qualified to buy the moon.

Relatives #2 are the whippersnapper's parents, also agents, who sold in the nick of time recently, since they were close to zero equity due to repeated stripping of their nice home's equity. So tragic, their equity burn rate.

#2 parents moved in with #1 kid.

Another relative asked "why didn't they band together to make the payments?"

"No, this house isn't worth what the kid paid for it. We'll stay here free until it's foreclosed on. We know Countrywide is behind on NOD's and NOT's so perhaps we'll get by for a year."

The popular loan program was the 10-yr I/O, which was 1/2% to 3/4% lower than the 30-year rate. Let's look at a conforming loan amount of $322,000.

On a 30-yr fixed @ 6.50% it's $2,035 per mo.

On a 10-yr int. only @ 5.75%, it's $1,543 per mo.

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Thanks for your previous explanation, Jim. Did they not charge extra points or fees of any sort? That is truly insane, if they were pricing exactly the same (front and back and rates) as full-doc. Sometimes, it seems things were even worse than I had thought, and that's pretty bad. ;-)

Anyway...on the example you gave above, assuming the buyer put zero down, and housing prices remained exatcly the same over time, in ten years:

-the 30-yr, FRM would have a 15% equity position (~$49,021), and no payment shock.

-the 10-yr hybrid ARM would have ZERO equity, and assuming rates go to 7% (very reasonable & low, considering inflation expectations and historic rates), their payment would go from $1,543 to $2,496 with amortization over 20 years.

While acknowledging my uber-conservative nature regarding fixed costs, getting a hybrid ARM (even if it's fixed for 10 years) when rates were at historic lows and prices at historic highs, shows how blinded people were by all they hype.

IMHO, these people should refi NOW into 30-yr FRMs. If they can't afford it with today's low rates, they were never qualified to buy these properties in the first place.

Barnaby33,

Agreed that the prepayment penalties ramped up the prohected return, and were very prevalent towards the end. You had a choice, take a 1, 2, or 3-year prepayment penalty and the longer the penalty term, the better the rate got.

CA renter,

No extra add-on fees either. This type of easy money was always available at the Big Three (World, Great Western, and Home Savings) with 20% down payment, if you didn't mind a neg-am.

First Countrywide required 10% down, then it was 5% down as a piggyback 80/15/5.

The program allowed realtors to be more productive. "Hello, you want to buy this house? What's your credit score? OK, call this number. Next?" No wonder we got up to warp speed when it's that easy.

Another complication to how the run-up ended was that other lenders had to follow Countrywide's lead, and some juiced their loans/underwriting even more.

First Franklin was always a B-quality lender, doing subprime 2-year fixed rate I/O loans that exploded in month 25. If you gave them 24 months worth of bank statements, they'd give you a loan, regardless of other warts. Towards the end, they were giving out 100% financing like that - read this story:

Link to Voice of SD story

Wow this topic sure did generate a lot of comments. To be clear, Jim are you saying that a low/no doc loan of the same type (10yr IO, Neg-am, 30 year fixed, etc) carried the same interest rate and fees.

I know ARMs were lower b/c lenders were convinced rates would increase generating a higher yield in the long run. However was the same full doc ARM a lower or higher rate than a low doc ARM.

Barnaby33- you might want to slow down and read my comments again; it was stock market go down and oil stabilize.

By the way the 10 year dropped below 4% today. Good news for interest rates.

"Additionally, why would a well-qualified borrower get an ARM when rates are at historic lows? Doesn't make sense, unless they are NOT able to really afford the loan (fully-amortized, fixed payments)."

CA Renter - I bought a vacation house (condo on the beach in La Jolla) in 2004 using a low doc, 10 year IO mortgage. I have excellent credit (FICO over 800). I didn't pay any rate premium for the low doc, and the rate was about 1% lower for the IO than a fixed loan for a second home. I put about 50% down. I calculated the fully amortized payment and paid at least that much (usually more) every month. I had every intention of paying off the loan before the reset.

Last month I paid off the loan and own the place free and clear. There was no prepayment penalty. I haven't calculated how much interest I saved by going with the ARM, but it is a significant amount. Is my situation typical? Of course not. But you can't just look at the numbers and make sweeping statements about all Alt-A ARM loans. For some people, it was an appropriate choice that saved money.

Thanks justme for the insight.

Yes LV Renter, the Angelo loans were the same rates and fees as A-paper. It was a new way to underwrite loans (or not). As long as their were buyers for them, CFC didn't care.

To be clear, this is historical. Today the I/O rates are higher, providing little benefit, if any, to the borrower.

I would have jumped at the chance for a no-doc loan on the same terms as full doc loan when we refinanced years back. It creeped me out showing random mortgage-generating desk droids copies of my tax returns. Intellectually I understand the reasoning in doing so, but given the chance I certainly would skip the guided tour through my financial life story, such as it is (either comedy or tragedy, not sure which).

Mozart, I agree with your concept, but I just don't know how anyone is expecting mortgage rates to go down anytime soon. The Fed has been lowering the overnight rate while mortgage rates continue to increase. Before long the Fed will start increasing rates, and the mortgage rates will rise further.

I've said it before, and I'll say it again: AS THIS MORTGAGE CREDIT DEBACLE GETS WORSE, WALL STREET INVESTORS WILL WANT TO SEE HIGHER RETURNS FOR THEIR RISK.

justme,

Thank you very much for sharing your story. It certainly sounds like you were doing the wise thing, but I'm willing to bet you are in the minority.

Most of the loans I'm aware of had fairly onerous pre-payment penalties. I haven't met a single person (in person) who was using these loans as you did.

When you look at the statistics for neg-am and other exotic mortgages, it seems the majority are using them for "affordability loans" -- that's even how they were marketed.

You definitely used the mortgage market to your advantage. Good job! :)

There are many type of loans available in the market. Its very important to examine all your options first before settling with your final choice. Thanks for the info!