04 Aug Alt-A Loans Are Next In Line To Default
“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 thatcrashed the balance sheets of many companies. The Alt-A loans were typically offered toborrowers withdecent 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 whilewaiting to cash in on rising home prices amidst hopes thatselling high would permit paying off theloan 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 loansas isthe call for payment on the principal along with that interest. The current weakness in the economy exascerbates the problem. As peoplespend a larger percentage of their monthly budget on food and gasoline, home mortgage default ratesare increasing, evenquadrupling in the Alt-A category over last year at this time, up to 12%. Expect that number to increase as the interest-only teaserpayment terms on those 2005 loans expire andprincipal 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.
Andy Miofsky, Esq.
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