The Next Looming Mortgage Mess

From the Sacramento Business Journal:

Subprime is the term applied to loans given to people with shaky credit. Alt-A is the next-higher category, typically covering mortgages to borrowers who had better credit but didn't want to document their incomes or wanted an initial period of low payments, often covering only the interest on the loan. While defaults have been creeping up in the alt-A category this year, the foreclosures that have wracked the housing market so far have been largely the result of defaults among subprime borrowers.

Many alt-A borrowers face a bump in their monthly payments starting mid-2010, according to financial services company Credit Suisse. The firm's figures, reported in the International Monetary Fund's report on global financial stability, show a big bubble of U.S. mortgage rate readjustments hitting during that time period, including borrowers with "option ARM" loans that allow a borrower to initially make payments that are so low the balance increases.

A record $400 billion in alt-A loans was issued in 2006, according to data by specialty publisher Inside Mortgage Finance, cited in published reports. Alt-A accounted for 13.4 percent of all mortgages offered that year. Some of the largest issuers of these loans were IndyMac Bank, Washington Mutual Bank, Countrywide Financial and World Savings Bank (now part of Wachovia Corp.).

As of January, California has more alt-A loans than subprime loans on the books — about 728,000 alt-A loans and 496,000 subprime loans among 12.2 million housing units — according to data from a division of research firm First American CoreLogic Inc., posted on the Federal Reserve Bank of New York's Web site. California's subprime borrowers are defaulting at 2.4 times the rate of alt-A borrowers, according to LoanPerformance.

Irvine-based RealtyTrac Inc., an online service that tracks foreclosed properties, said that it and its competitors can't tell if borrowers have a subprime, alt-A or prime loan when they default.

If Hanson's theory holds up, it's bad news for California homeowners just as the country's foreclosure problems are easing slightly.

Hanson, who was a wholesale mortgage broker for 20 years, bristles when alt-A is described as lying between subprime and prime.

HERE"S A REPORT FROM SACRAMENTO:

 

 

 

 

SACRAMENTO – Democratic lawmakers hoping to prevent another foreclosure crisis have approved a series of homeowner-friendly bills in the Assembly, but those measures face tougher prospects as they head to a key Senate committee today.

The package of seven bills, among other steps, would ban so-called stated-income loans, tighten the rules on which borrowers can get subprime loans, and require lenders to give borrowers a summary of key loan provisions in both English and the language the deal was negotiated in.

Lieu's bill, AB 1830, seeks to regulate subprime borrowing by capping prepayment penalties at three years, prohibiting negative amortization loans and requiring that borrowers be able to make monthly payments beyond introductory teaser rates.

Assemblyman Alberto Torrico, D-Fremont, would require that homeowners be notified before rising interest rates on their variable loans trigger higher monthly payments. Paul Leonard, the director of the Center for Responsible Lending in Oakland, acknowledged the Assembly measures will be a tough sell in the Senate.

For example, he said, stated-income loans – in which borrowers provide little or no documentation to prove their income – were originally designed to allow self-employed people and small-business owners to apply for loans without having to provide years of personal and business tax returns. In exchange for the convenience, borrowers paid a higher interest rate.