Alt-A Loans Are Next In Line To Default
By Andy Miofsky, Illinois Consumer Law Attorney on Aug 4, 2008 in Mortgage Issues
“What’s next?” mythical television president Jedidiah Bartlett would ask, after solving one problem and moving on to the next crisis. In the world of mortgage foreclosures, the “What’s next?” answer is Alt-A loans. These loans were graded one step above the disasterous subprime loans that crashed the balance sheets of many companies. The Alt-A loans were typically offered to borrowers with decent credit scores, but, without verification of income. Many were written to housing speculators who only had to pay interest on the loan for the first 5 years while waiting to cash in on rising home prices amidst hopes that selling high would permit paying off the loan balance.
The New York Times reports, in Housing Lenders Fear Bigger Wave of Loan Defaults, interest rate adjustments are not so much of a problem in this segment of loans as is the call for payment on the principal along with that interest. The current weakness in the economy exascerbates the problem. As people spend a larger percentage of their monthly budget on food and gasoline, home mortgage default rates are increasing, even quadrupling in the Alt-A category over last year at this time, up to 12%. Expect that number to increase as the interest-only teaser payment terms on those 2005 loans expire and principal payments become due. Chief economist Mark Zandi of Moody’s Economy.com predicts a new a wave of foreclosures will follow the 5-year reset of those 2005 loans in 2010, leaving borrowers looking for ways to defend against foreclosure.
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