So the $500 Billion pay option ARMS are toast, but they are not all Alt-A loans. Some were/are subprime and prime.
Very few of them were subprime, but it doesn’t matter. We have $500 Billion in loans and banks will be taking a huge loss on them. They are heavily concentrated in California, and more specifically San Diego. Alt-A will likely be fine if you take the option-arms out of the equation, because most loans currently would reset to a lower rate. However, if interest rates start to jump we’ll see just how accurate people reported their income for Alt-A loans.
There’s also the problem that the historical causes of foreclosure are still happening (death, divorce etc.) Without equity the houses can’t be sold to prevent a foreclosure, so we may have more foreclosures than normal just from the typical reasons.
