Alt A’s loans are sketchy not only for their option subset, but also because they relied very heavily on one’s FICO score rather than detailed documentation and I am not sure about how much they required for down payments as well. So you can have these as “liar” loans as well as “walkaway” potential…i.e. they’re still shakey due to other factors besides not having neg-am, interest-only type options. Terrible thing about devaluation is that it makes all debt more burdensome, even the “good” debt.
Tax relief act of 2008 allows one to default on their home mortgage without getting hit with the IRS considering the defaulted amount as a gain to the person defaulting. Since this may not last forever, I would think it an incentive to walk away if you were already feeling crappy about your debt.
One more very important thing to keep in mind is the study done by the Boston Fed regarding the effect negative equity has on default rates. Basically, the biggest indicator of the probability of someone defaulting on a loan is if they are in a negative equity position. Income level and FICO dont seem to matter nearly as much as if they are upside down in the loan.(And this seems very rational.)Well, I have to believe that many loans made in the last 4 or 5 years are in a negative equity position at this point in CA!
