[quote=Fearful][quote=FormerSanDiegan]The option ARMs are toast already because of negative amortizaiton. The Alt-A interest only or “traditional” ARMs are not nearly as deadly.
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There are two separate factors. One is that these are ARMs and can reset to prohibitive interest rates. The other is that these are Alt-A, meaning that their overall affordability, even at the initial interest rate, is in doubt. From Wikipedia:
Characteristics of Alt-A
Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from the types of “conforming” or “agency” mortgages, ones guaranteed by the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.
There are numerous factors that might cause a mortgage not to qualify under the GSEs’ lending guidelines even though the borrower’s creditworthiness is generally strong. A few of the more important factors are:
* Reduced borrower income and asset documentation (for example, “stated income”, “stated assets”, “no income verification”)
* Borrower debt-to-income ratios above what Fannie or Freddie will allow for the borrower credit, assets and type of property being financed
* Credit history with too many problems to qualify for an “agency” loan, but not so many as to require a subprime loan (for example, low scores or serious delinquencies, but no recent charge-offs or bankruptcy)
* Loan to value ratios (percentage of the property price being borrowed) above agency limits for the property, occupancy or borrower characteristics involved
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Simply put, these are mortgages that, even initially, were not affordable enough for the GSEs to buy.
Lower reset interest rates help the Alt-A problem, but they absolutely do not make it go away. It might not be a tsunami, but not a ripple either. Unfortunately, the underlying data on the mortgages is poor, so no one knows for sure how unaffordable the mortgages are, and one is forced to go back to more broad metrics such as house price to income ratios.
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I had a stated income loan, hence it was alt-A.
I did not overstate our income. It was simply too easy to do stated with virtually no penalty at the time in terms of higher rates. It is definitely a different world today.
But I am willing to bet that there are a significant number of alt-A loans where the borrower is ready and able to pay. They just may not be willing depending on the value of the property with respect to the loan amount.
