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Mortgages that require little proof of income worry housing experts
By Dan Levy
and Bob Ivry
Bloomberg News
Published on Sunday, Sep 21, 2008
For Dean Nessen, the choice of a mortgage was easy. By agreeing to pay only interest for three years, the self-employed salesman didn't have to show proof of income and landed a rate of 6.25 percent.
Now, four years later, Nessen's industrial coatings business has gone belly up and his rate has jumped to 10.6 percent. He can't afford the payments and may have to move his family out of their home in Commerce Township, Mich.
Homeowners lured by low introductory rates to ''Alt-A'' mortgages, which typically require little or no proof of a borrower's income, could fuel the next wave of foreclosures and further delay a recovery from the worst housing decline since the 1930s. Almost 16 percent of securitized Alt-A loans issued since January 2006 are at least 60 days late, data compiled by Bloomberg News show. Defaults will accelerate next year and continue through 2011 as these loans hit their three- and five-year reset periods, according to RealtyTrac Inc., an Irvine, Calif., company that supplies foreclosure data.
''Alt-A will be another headache,'' said T.J. Lim, the London-based global co-head of markets at Unicredit Group. ''I would be very worried about anything issued in the last half of 2006 and the first half of 2007.''
About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Md. Of the Alt-A borrowers, 70 percent might have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Md.
Risks extend beyond banks and consumers to Fannie Mae, which owned or guaranteed $340 billion of Alt-A mortgages in the second quarter, equal to about 11 percent of its total single-family mortgage credit book of business. The loans accounted for half of the company's second-quarter credit losses, according to a regulatory filing, and Fannie Mae said on Aug. 8 it won't accept any new Alt-A loans after Dec. 31.
Alt-A holdings at Freddie Mac were $190 billion, or 10 percent of its mortgages, in the second quarter, according to the company's Web site.
While subprime home loans describe a type of borrower — those with bad or limited credit histories — Alt-A, or Alternative A- paper, are shorthand for a type of loan developed in the mid-1980s.
Many Alt-A loans went to borrowers with credit scores higher than subprime and lower than prime, and carried lower interest rates than subprime mortgages.
So-called ''no-doc'' or ''stated-income loans,'' for which borrowers didn't have to furnish pay stubs or tax returns to document their earnings, were offered by lenders such as Greenpoint Mortgage and Citigroup Inc. to small business owners who might have found it difficult to verify their salaries.
Alt-A loans were used to expand home ownership among first-time buyers as prices climbed out of reach for many of them, according to Rick Sharga, executive vice president for marketing at RealtyTrac.
''To grow, the market had to embrace more borrowers, and the obvious way to do that was to move down the credit scale,'' said Guy Cecala, publisher of Inside Mortgage Finance. ''Once the door was opened, it was abused.''
By 2005, the credit score required for an Alt-A loan fell as low as 620, traditionally the definition of a subprime borrower, said Steve Donlin, a former mortgage broker who's now vice president of operations at Loan Safe Solutions Inc. in Corona, Calif., which helps people negotiate changes to loans they can't afford.
Almost all stated-income loans exaggerated the borrower's actual income by 5 percent or more, and more than half increased the amount by more than 50 percent, according to a study cited by Mortgage Asset Research Institute in its 2006 report to the Washington-based Mortgage Bankers Association.
The Alt-A market grew more than seven-fold to $400 billion in 2006 from $55 billion in 2001, according to Inside Mortgage Finance.
Since home prices peaked in July 2006, they have fallen 18.8 percent nationally, leaving an estimated 29 percent of borrowers who bought in the last five years with houses worth less than what they owe on their mortgages, according to Zillow.com, an Internet real estate valuation site.
The ''serious delinquency'' rate for Alt-A mortgages issued in 2007 hit 10 percent in half the time it took for those from 2006 to reach the same level, Moody's Investors Service said in a report last month.
''Alt-A loans have turned toxic,'' Cecala said. The combination of exaggerated income, falling home prices and payments that reset higher is ''a recipe for disaster,'' he said.
About one-third of Alt-A loans are payment-option adjustable-rate mortgages, said Donlin of Loan Safe Solutions. A borrower with an option ARM can pay as low as 1 percent interest by deferring some of the money owned until the loan balance reaches a predetermined limit, usually 110 percent to 120 percent of the original mortgage amount. Then payments immediately rise. They also automatically shoot up after a set time period of up to five years.
The loans accounted for 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, according to an estimate by Inside Mortgage Finance.
The backlog of growing mortgage delinquencies has overwhelmed mortgage servicers, who collect monthly payments from homeowners and distribute them to securities investors, said Nessen, the Michigan borrower. The home he shares with his wife and three children, ages 7, 3 and 13 months, is scheduled for sheriff's auction at the end of the month.
''Granted, they are overwhelmed by people in my situation,'' said Nessen, 41. ''But that doesn't help me.''
For Dean Nessen, the choice of a mortgage was easy. By agreeing to pay only interest for three years, the self-employed salesman didn't have to show proof of income and landed a rate of 6.25 percent.
Get the full article here.
Comments
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Posted 07:59 AM, 09/21/2008
And i have to pay for this stupidity?
