And now the Alt-A’s:
The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.
Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.
The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.
In all the previous housing crisis threads, smart commenters warned that the real shit was going to hit the fan when the Alt-A’s started failing:
While ‘subprime’ was the word of the year for 2007, ‘Alt-A’ will be the word for 2009 or 2010. And it is going to kill us.
Alt-A are the non-conforming loans made to people with good credit ratings, but who paid extra points in order to avoid proving income and assets. Since any monkey with a job and some self-restraint can maintain a decent credit rating, an enormous number of people who could not afford to put any money down were given these loans, with not real underwriting analysis, so they could buy overpriced homes.
The Alt-A problem is an order of magnitude larger than the sub-prime problem. It will not manifest itself until at least another year, so hold on tight and hoard Yen, Loonies, Rubles and Krugerrands. (Euros and Pounds Sterling won’t hedge this risk, because Europe and the UK are in as much trouble as we are, but they just don’t know it yet.)
cleek
damn you Obama! why did you put us in this mess?
maybe we can drill our way out of it…
joe
Oh good Lord! I thought you wrote “AT-ATs.”
On top of everything else, that last thing we need at AT-ATs stomping about.
El Cid
Clearly this is the fault of Nancy Pelosi and the Democrat Congress because…um, er, yeah!
Foxhunter
Yes, it will get ugly. Anecdote: a co-worker with a spouse that is also gainfully employed, recently requested to flush her 401k to stop an upcoming foreclosure. What happened? She bought a home 5 years ago and took out a second for home improvments. The second was interest only and is due to reset in a few weeks (reset from 6 to 13%). The problem? Her home value has plummeted and now she is upside down, hence the 401k borrow. Stupid describes all parties involved.
chopper
it’ll hit A’s too, eventually. even people with good credit and real income still have eyes bigger than their wallets – buying a home that’s at the very top of your price range before a huge rise in food, service and gas prices is a prescription for disaster.
cain
whew.. I’m only a year away from paying off my house. I’m going to be in good shape.. it’s going to be a seller’s market for awhile it seems.
cain
Robert Sneddon
I’m not sure the European currency markets will be as hard-hit as the writer quoted suggests.
It’s a two-part problem for the US — a lot of failing mortgages and the CDO toilet-paper the big US financials are trying to pass off as worth something. In Europe there’s only a little of that Charmin in the money pond proportionally speaking, and way fewer dodgy mortgages. We’re still going to take a hit but it’s not going to be very bad.
Incertus
She’s never heard the phrase “cut your losses”? I got a late start on the retirement saving–I didn’t have a job with a plan until about 3 years ago, and I’m pushing 40 now, but I contribute the max, even though it hurts a little, and that money might as well not exist as far as I’m concerned. The idea of pulling it out to take care of a problem now just blows my mind.
Xenos
Yikes! The one time here I was not talking out of my ass, and somebody noticed (blush).
For future reference, I was not being prescient – this was all on the front page of the Wall Street Journal in November 2007, although the bad news was obscured by somewhat technical language.
So it took the New York Times 9 months to figure out what the financial insiders were admitting to and gossiping about in their most public forum?
chopper
fuck no it aint.
chopper
yeah, but a lot of european banks got in on the gravy train too. HSBC is taking a big shit right now.
Dennis - SGMM
No more stupid than those donkeys who used their homes as ATM’s through the use of HELOC’s. Once the gov finishes bailing out the subprimes and the Alt-A’s with our money, the HELOC folks will be lining up for their place at the trough. America: where prudence is punished and thrift makes you a victim.
Punchy
This goes a long way in explaining exactly how Bob and Mary Jones, a married couple consisting of a PE teacher and substitue teacher (making a combined $65K) respectively, were living in a McMansion and 2 SUVs. I never could wrap my head around (having grown up in a very middle middle-class fam with thrifty-as-hell parents) how these peeps could afford such oppulence.
Color me furious that we’re supposed to bail these greedy fucking bastards out. Fuck them and their $50K Denali.
Foxhunter
Incertus, I had a nice statement on the ifs and whys, but wordpress ate it. Shorter version – that is what the 401k ninjas are rec’ing…rather than a wholesale borrow of 60k, which would take her years to replenish. It’s painful to watch…..
Xenos
The 401k savings are protected from creditors… what a stupid way to double-down and multiply one’s losses.
The same uninformed wishful thinking that got them into the hole is keeping them digging.
J. Michael Neal
The other part to watch is commercial real estate. It’s overbuilt, retailers are going bankrupt (don’t get me started on the Steve & Barry’s scam), and retail sales are tanking. This is where most smaller banks are going to get hit hard. Very few of them are heavily into residential mortgages; commercial real estate and construction loans are their bread and butter.
John Cole
What is the Steve and Barry’s scam?
ThatLeftTurnInABQ
That’s why I’ve known for years that this storm was coming. You didn’t need a PhD in Economics to see that far too many people were living well beyond their means. All you had to do was have some common sense, remember how things used to be, and go to lots of kid’s birthday parties, or just drive down the street and look in all the driveways and garages.
It doesn’t take a genius to figue out that a massive planet killing SUV (or 2 or 3) in every driveway + a big screen plasma TV in every living roon + credit card offers being mailed to the family pet = big trouble down the road.
Thanks Alan. Thanks Ben. Heckuva job.
fester
Yeah — and I wonder why it took so damn long for this to make the front page as anyone who was looking at the images at this link
images.google.com/images?hl=en&q=mortgage+reset+chart&gbv=2
and was assuming that magical economic ponies were not flying out of Bernacke’s, Bush’s or the Flying Spaghetti Monster’s ass knew that Alt-A and Jumbo were coming down the pike with the same problems as sub-prime and NINJA loans; just a couple of years later. We are in the 3rd inning as the grounds crews are cleaning up the base paths for another round of running the home into the ground.
Grumpy Code Monkey
No, for a couple of reasons. First of all, a lot of sellers are dealing with negative equity (or whatever the proper term is) — two years ago they paid $300K, but the house is now worth $230K (this is the case with one section of my subdivision). I can see someone eating a couple of thousand dollars to get out from under a mortgage, but tens of thousands?
Secondly, there aren’t going to be that many buyers now that credit is drying up as lenders keep going kablooey. And what buyers there are won’t be willing to pay those inflated prices.
If anything, the market’s going to be stagnant for a while. There are houses in my subdivision that have been on the market for over a year now, with no apparent movement.
We’re damned lucky in that our house hasn’t lost any value; our section is the one section in the subdivision whose base price hasn’t dropped in the last couple of years, whereas all of the other sections had their base prices drop anywhere from 10 to 30 percent. Our section hits a sweet spot in price per square foot, plus we had top-notch builders. And we know we’re stuck here for at least another five to seven years.
And I’m in Central Texas, where housing prices are relatively sane.
Foxhunter
Xenos, you are right. But the refi vultures are circling and they have recommended that the 401k be tapped to prevent foreclosure. Even after getting conned the first time, said individual is still willing to eat there shit hook, line and sinker.
That is a classic read. See Calculated Risk for a detailed explanation.
Stuart Eugene Thiel
Krugman didn’t put it this way, but in today’s column he points out that after the Alt-A’s come the Ctrl-A’s: “Select All” for the next round of foreclosures.
Walker
Phase 3: Negative Amortization Option Arms. Coming 2009.
Dreggas
This was all right out in the open for anyone to see. And yes it will not only hit Alt-A’s but also standard primes considering that wages have not matched inflation in the least. Add to that rising energy and food costs and people wind up with a choice between paying the mortgage and eating in some cases. Three of the basic needs of human beings are under assault right now. Namely food, clothing, and shelter and the pricier one will give even more as the other two continue to rise price wise.
Oh and while some of this is due to natural disaster, you can thank the Republican party for thise entire clusterfuck. It’s not the democrats, it’s not the liberals. In fact, it was we, the DFH’s who said it would happen. The past 8 years should become the textbook for economic, sociological, and history classes as demonstrating what not to do. Including chapters like:
1.) Regulation, it’s not so bad after all.
2.) When going to war, don’t tell the populace to “go shopping”.
3.) Do not invade more than one country at a time.
4.) Do not cut taxes when going to war.
5.) Do not replace economical cars with gas-guzzling bigger cars and SUV’s
Of course number 1 was pretty clear and should have been a given after oh, I dunno, the great depression, Black Monday, the 80’s, the .com bust.
Number 2 really lacks any historical counterpart, but should be common sense.
Three could have been learned after our defeat of the germans in WWII etc. see 2 front war.
Four, again no historical counterpart and again it should be common fucking sense.
Five, See 70’s, OPEC embargo, oil crisis. This one should have been obvious I mean jesus christ it wasn’t even that long ago. But noooooo those “soccer mom’s” had to have their status symbols and a station wagon just wouldn’t do no matter how new.
toujoursdan
so hold on tight and hoard Yen, Loonies, Rubles and Krugerrands.
I get paid in Loonies. Yes, they have performed well against the Greenback, but not so well against the other major currencies. 85% of Canada’s trade is with the US. If you guys sink, we get pulled down with you.
(I’ve read that the best performing currency against the U.S. dollar has been the Australian dollar.)
whocoodanode
How about not invading any countries at all, unless directly attacked by the military forces of that country?
The lesson of WWII was that war is over or society is, but we ‘murkins just want to find out a way to keep having it.
America is about to demonstrate the effects of not learning the lesson. The specific events are only detail. You do not begin wars: it is doom.
Ask the original Rome.
Zuzu's Petals
Not to mention a little undercurrent here in California:
South of I-10
Thanks for the reminder of why I live in a little tiny 1950’s ranch house and drive a Civic. My little tiny 1950’s ranch house has a little tiny note. For years I have watched people (who I know don’t make a dime more than I do) living in huge houses and driving SUV’s and wondering how they could possibly be making the payments. The real estate people keep saying everything is fine here, but I work in the legal field, and the number of executory process suits filed has at least doubled in the last year. The open account suits have increased too.
Ella in NM
Yeah, can I also give a big THANKS to all the FAILED real estate speculators (whether by profession or personal vanity) from people like me who have a house worth DOUBLE what we owe on it, and yet can’t get a crappy $150K VA refinance loan–even though we would actually REDUCE our monthly outgo for debt and mortgage payments and enhance the value of the house if we WERE approved. We are now considered financial pariahs because a couple of years ago (after my job loss) we had several late payments. Never actually missed one, are currently totally fine, but have a few “dings” on our credit that are killing us.
Thank you so much. I hope you all enjoyed your bubble party while it lasted
Zuzu's Petals
Sorry, wrong Sac Bee link in last.
Here’s the right link:
SacBee
J. Michael Neal
No idea if anyone is still reading this, but . . .
Steve & Barry’s business model had nothing to do with retailing. They made all their money (to the extent they made any money) through kickbacks from landlords. Mall owners wrote checks to them to get them to get their stores, so that they would have the anchor spots filled. They were one-time payments, I think, and the intention was to eventually get them back through rent. Of course, it turned out that a business model based upon receiving bribes wasn’t a long term winner, so S&B’s went bankrupt.
Given how quickly that happened, a lot of mall owners effectively collected negative rent from them, often by a lot. Good move, guys.
Jim
I know I’m going to sound real naive here, but I don’t understand why lenders can’t invite those like Ella in NM and the thousands of others who are sinking to come in and make arrangements for new mortgages that they could actually handle. Why do these companies want to see the Ellas of the world go under? Isn’t it in the mortgage companies’/banks’ best and mutual interests to help their customers pay for their homes in a way that works for them? But I’m an English major. What do I know? Oh . . . and I don’t yet accept the old “They just want to rip us off until the government has to bail them out” argument. But maybe I should?
Tax Analyst
The “home as ATM” folks are going to be in for an extra rude surprise if and when they do default. It’s called “Cancellation of Debt” Income, and if they did a re-fi on their Main Residence and the money did NOT go for improvements to that residence then they turned their initial “Non-Recourse” loan into a “Recourse” loan. The difference between their Outstanding Balance and what the Lender receives through a foreclosure sale will thus be fully taxable at Ordinary Income rather than Cap. Gains rates. Of course they can beat the Tax part by declaring Bankruptcy or Insolvency. NOTE: Insolvency does NOT protect Retirement Savings. Folks who do not Re-Fi but get foreclosed on their Original purchase loan are “Non-Recourse” (at least here in California – I believe the same holds true in most states, but I would suggest checking with a Real Estate lawyer in your state if you fall into that category), and thus are not subject to COD Income. All they have is a Sale of their Main Residence and there are plenty of generous gain exclusions available if they owned and lived in the house at least 2 of the last 5 years.
Tax Analyst
Well, one of the reasons is that many sub-prime and probably a lot of Alt-A loans are not owned by or serviced by the original company that sold the loan. After collecting their commissions many of these outfits then bundled these loans and sold them off to Big Money Investor’s, like Hedge Funds, or larger banks as Grade A Investments. What that means is that the actual ownership of many of these loans is not held in total by any one person or entity. To complicate matters more, within the groups that purchased these loans there are different risk qualifiers – Investor’s could take smaller interest on their money in return for being in front of the line should the investment go bad and return less than 100% of all the capital investment. Others opted for higher interest payments, but in return have a less secure place in a loss scenario. To renegotiate the terms of a loan there would have to be a way to reconcile loan-note holders with vastly differing priority perspectives…not an easy task to accomplish by any means.