[quote=deadzone]Are you suggesting that the Alt-As won’t “recast” like the Option ARMs? Because when the reset hits, it’s not just the interest rate. Nearly all of these borrorers are now well under water (See WSJ front page today). This means due to their decreasing LTV, monthly payment will still go up regardless of interest rate.[/quote]
deadzone – DaCounselor explained it well.
Being underwater on an existing loan has nothing to do with the rate on an existing loan. It is not dependent on LTV. Only a new loan is. Your typical 5/1 Alt-A loan made in 2005 will reset in 2010 at a rate determined by the index and the margin. Typical margins were 2.25% on the 12-month LIBOR. If those were to reset today the fully-indexed rate would be ~1.25% (LIBOR) + 2.25% (Index) = 3.5%. Since most have a minimum rate the rate would likely stay the same.
If it was an interest only loan, they would now pay principal. The alt-A resets are not (at least for now, while short-term rates remain below about 4%) the disaster trigger event that was predicted or assumed when short-term rates were nearing 6% in 2006 (which would imply 8%+ reset rates).
