Alt-A Loans Continue To Spiral Down

I haul out this chart every couple months. It seems there is always something that makes it relevant again. Today it’s a report from Fitch Ratings that says it expects losses on Alt-A loans to far exceed its earlier downgraded assessment.

As you look at the Fitch commentary keep in mind that they include both Alt-A loans and Option ARM’s in their Alt-A classification.

The rating agency said it now expects average cumulative losses om 2005, 2006 and 2007 vintage Alt-A transactions to hit 2.72, 6.78 and 9.58 percent, respectively, up dramatically from expectations at the agency earlier this year.

Fitch cited a “rapid increase in 60+ day delinquencies experienced over the past six months,” despite servicers’ collective efforts to hold off on actual foreclosure sales — likely implying that a halt to foreclosures is having little effect in resolving borrower delinquencies. Between May and October 2008, Fitch said that 60+ day delinquencies for the 2007 vintage increased from 8.80 percent to 14.65 percent; 2006 and 2005 vintages also experienced steep increases rising from 10.30 percent to 14.24 percent and 6.57 percent to 8.79 percent, respectively.

Now look at the chart and what do you see? Obviously, we aren’t even into the teeth of the resets and recasts for these loans. In fact, the lions share of the adjustments aren’t even scheduled to take place until somewhere in 2009 continuing into 2010. So why are they apparently falling apart right now?

You can speculate until the cows come home about why this is falling apart so fast but here are a couple of ideas. I’m sure there are others.

A lot of these loans were used to purchase somewhat upscale to frankly upscale homes by people that had no business buying in that price range. The purchases were facilitated by stated income loans and the only way they could possibly work was for home prices to continue to escalate. When the bubble popped the game was over but the buyers had a bit more in reserve than the subprime borrowers so it just took a little bit longer to work its way through.  The reserves are gone and it’s just a matter of time until the foreclosures roll through.

The second thought that occurs to me is that the recession is beginning to bite. The first wave we now see may well be borrowers who were dependent on bubble economics. Real estate agents, mortgage brokers, title companies, bankers, you name it. They started getting hammered by the recession earlier than most and logically are the first to default. They also tended to buy above their means as they believed in the fairy tale. If this is true, then we’re just seeing the tip of the problem.

This may well signal the beginning of a move up the scale in terms of foreclosures. We aren’t to a large degree talking about first time homebuyer types of homes now. The upper end is starting to get hit and that has a whole new host of implications. These homes are not particularly attractive to investors as the price generally is too high for the property to pencil out as a viable rental. Additionally, the dispossessed homeowners are not likely to adapt well to a much lower standard of living. Moving from granite counter tops in a 4000 square foot house to Corian in a tract home is not an easy adjustment.

I expect that this development is going to provide more juice for the loan modification crowd. These borrowers have more political clout and most communities don’t want to see a lot of vacant houses in their signature neighborhoods. The issue, however, is going to be one of scale. To modify these loans in order to keep the occupants in the house is going to require some breathtaking write-downs of principal. Forget lowering interest rates, we are talking about debt forgiveness that will likely be in the hundreds of thousands of dollars per property. That, my friends, is one big political and economic problem.

Every now and then, I think that we may be working our way out of this mortgage morass.
Then something like this pops up. I suspect that I may well pull this old chart out a couple more times before I get to quit writing about this.


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