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Alt A Loans...and You Thought Sub Prime was a Problem?

We're screwed! For those of you in real estate that think the press is out to demonize real estate with a lot of talk about sub-prime loans...it isn't! Poor lending practices are. There is going to be more talk of a new issue arising shortly. They are called "Alt-A Loans!" What are Alt - A Loans? They are also referred to as "Liars Loans" or "stated Income Loans!" In real estate we know them as "No or low docs." That is because little or no documentation was required to obtain mortgage financing. That is... when a person on the surface appears to have the means to repay, but they are either self employed, an entrepreneur or independent contractor (real estate agents) or live on unsteady sources of income or commissioned salaries. With Alt-A loans, the lack of income or documentation is not an impediment to obtaining a mortgage if the borrower were willing to pay a slightly higher premium to cover the risk. Alt-A loans were also common in the purchase of second homes, vacation properties, and investment homes. Since the value of these investments and property values are now in question so are the worth of the securities...that was spun off from them. Let's keep in mind that many of these Alt A mortgages were also 100% no money down. In 2006 sub-prime accounted for over $386 Billion in 2006. Alt-A loans were also collateralized and securitized the same way sub-prime loans were and sold as securities to banks around the world! The problem with this? Delinquency in payments of mortgages that is now rising into the double digits in December and January now make those securities less desirable, and the banks are selling these holdings at steep discounts. It is also estimated that 25% of these no doc or Alt-A loans are also sub prime. So what has just started happening is that the value of Alt-A's are now starting to create problems for the banks and lenders in addition to sub-prime loans. Why now? Because recently delinquencies in Alt-A loans have risen as much as 18.1 percent. This will further threaten the financial health of bank's, investors, and the ability to obtain new loans.

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Posted by Jim Crawford ~ Atlanta Real Estate-ABR E-PRO on 02/29/2008 12:26 PM

Comments (52)

alt a loans mortgages delinquencies liar loans stated income loans defaults banks portfolios subprime no doc low doc no documention

Originally posted at: Atlanta Real Estate | Atlanta Housing News for Real Estate: Alt A Loans...and You Thought Sub Prime was a Problem?

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52 Comments on Alt A Loans...and You Thought Sub Prime was a Problem?

FEB

2008

Jim, I have heard a lot about this from my lender. That and the fact that my sister was building a house in Colorado and being self employed this is the type of loan they were getting. My brother in law was the general contractor and I pressured them to get it closed before the house was really totally completed but I'm glad I did. I think the loan they got has totally disappeared now.

Marchel Peterson Spring TX Real Estate E-Pro ABR That is my understanding that even with great credit..these loans are all but impossible to obtain anymore. Now I wonder, how many real estate agents purchased with this type of loan? I know I did years ago! Will they be able to refinance?

My fear is that now the lending community will over react the other way.

Gayle Balaban/Norris Lake Tn. Real Estate I think that has already started.

It's an epidemic the lenders brought on themselves thanks to a complicit FED. Money was cheap and as long as values continued to climb, approving loan after loan after loan (and refi after refi after refi) was considered safe. Thanks to greed, lenders failed to see the warning signs until we were in a financial and real estate market freefall. Folks like Countrywide's Mozilo should be stripped of everything and then some.

Jesse & Kathy Clifton - Fairbanks Alaska Realtors The problem is that these stories are from overseas banks! They sold this crap around the world! So when we hear the term "Made in the USA!" It woun't have ht same warm fuzzy feelings!

Jim you're dead on!. The lending crisis is a multi faceted problem. Yes, the pendulum has already swung the other way. i just had my personal residence appraised and it came in 75K less than what I'd list it at (true market value, mind you) not an "inflated in my mind" value! ha ha It's a definite sign of the times!

Carmen Tomlinson Thanks ! No one is immune from it. I sold my own home last summer for about 100K less than I could have received a year before. Sometimes that is life.

FEB

2008

True.. Mozilo and his ilk aren't the end of the chain but the beginning... the investors who bought and leveraged this debt, rolling billions into high risk SIV's should also face the same fate. I don't feel sorry for them either... they well understood what they were getting into. The innocent buyers and sellers who got caught in this trap are who I feel for.

Jesse & Kathy Clifton - Fairbanks Alaska Realtors I know, but it also does not end with the homeowner. There are pensioners and their retirement funds, cities and municipalities, universities, banks, mutual funds etc...plus overseas banks! Oh, BTW I read an article how Mozilo is still selling his stock as fast as he can!

I read that as well... if he keeps it much longer the only thing the certificates will be good for is lining the bottom of a bird cage.

Jesse & Kathy Clifton True!

I'm just glad I got a good rate back in '04 when we bought in Lancaster. Has anyone mentioned that stateds can also be avoided by supplying back tax returns - if you're a realtor, for instance?

Jeff Geoghan MBA, - Lancaster PA Real Estate Expert Yes that is what I did subsequently! I believe we had to provide a P&L statement also. No problem. I do know most agents I know did no and low docs.

I know that stated is the way that I have bought all of my homes. It is really to bad that these are gone now. Today you see more and more people that are moving away from jobs and into the self employed and independent contractor status.

The mortgage industry propped up sales for years, and fueled the exuperance of the this decade. The golden goose is dead.

I am sure many people who got "Stated Income Loans" lied about their incomes. Nothing had been said about that.

Jim, it really depends on the lender, because traditionally from an underwriting stand point. Alt-A would simply mean alternative documentation in regards to obtaining one year W'2, 2 paystubs for the current month and 2 months bank statements for the borrower. This is also referred to as limited documentation.

A borrower with excellent credit would receive this alternative to documentation instead of needed to provide 2 years of tax returns and account statements on all asset accounts. So I just wanted to clarify the meaning. If Alt-A is being advertised to you as NO-Doc or Stated Income, they are misusing the term.

The days of Stated High LTV lending is ending due to fraud and yes, considered a Liars Loan by Loan Officers that have originated them. The sub-prime element in these lending practices, meaning shifty scumballs, has really been unfortunate. Many people in the senior population have been put into these loans because the loan officer, knowing the client was on a fixed income like Social Security or Disability, put them into these loans on ARMS and now they too are adjusting and inflating the payments. The loan was never designed for a fixed income borrower. They just took the Fico score and the assets.

The stated income loan was originally designed for people like you and me who are on commission and experience fluctuation in our income level monthly where stating an average monthly would give us the ability to get mortgages. Now we, self-employed will suffer. Quite unfortunate!!

Bronson Barber I used that type of loan for one home, until my loan officers wised me up to providing past tax returns and a profit and loss statement. The savings were substantial. I also feel it is a loss for all that could use them, but they were really abused.

Scott Hoyt So true! If you could fog a mirror you got a loan!

Richard Lecinski Well they are also called "Liar Loans!"

Julie Hite I agree fully with everything you said! The problem is that last month all of a sudden persons in that type of loan started to fall behind in their payments. In January alone, almost 20% of all Alt-A were delinquent. When they are behind in their payments, the quality of the bank portfolio changes, When the portfolio is downgraded, they can't sell the portfolio to others because of percieved risk. If they cannot make their current assests liquid...guess what? They cannot lend or make new loans! We have a major problem here. This is some very serious stuff.

I was just explaining this problem with a potential buyer this afternoon. She was calling for her daughter. But once I started making conversation and doing some preliminary pre-qualifying, we ended up discussing how many factors were involved in our real estate problems. She decided she shouldn't waste my time right now because after talking to me, she doubts her daughter can get any financing. Hmm.

Though many of the Alt-A loans are entrepreneurs, many are also speculators who wanted to buy all they could to flip and make a great profit.

It is now and always has been a two way street. I know that mortgage lenders are the enemy dijour these days, but I also know PLENTY of real estate agents who knew better (and in some cases provided their client with the name of lender who could 'get anyone financed'). Alt-A, sub-prime and other non traditional programs were originally designed to help people who had issues (self employed, etc...) or for the use of investors who had the financial understanding to know when and how these particular products applied to their business.

I think it is also necessary to look at the people taking out the loans as well. How many people truly didn't understand the financial liability they were committing to when they signed the mortgage doc? Probably a lot less than are now claiming they were a 'victim' or unscrupulous lending practices. As a real estate agent I know for a fact that many agents made commission earnings on sub-prime and alt-a loans, and will continue to do so for the foreseeable future. As real estate professionals, we should strive to help ensure that our clients buy into a transaction they can both afford and benefit from. I always take the time to review any and all financing alternatives with my clients, no matter who they are getting a loan from. In some cases, when they were staring down the barrel of a horrible 2/28 or ARM or stated loan that I knew was being pushed too far, it cost me the sale. In one case they wound up using someone else to make it happen. But in almost every other one, they thanked me for my input and found something that they could afford and are still enjoying the benefits of ownership to this day.

The banks found so many ways to finance loans, even to buyers that were great risks. For the self-employed (us), sometimes this was the only way to purchase a home. I'm sure it has become more difficult to obtain this type of financing. We must really educate our buyers on the types of loans they are looking for. Great post.

Lisa Hill (Daytona Beach REALTOR®) You're right! There are loads of components in today's ills. Most today cannot qualify. I am seeing this at many levels.

Sharon Simms St Pete Florida CRS CIPS CLHMS Well the numbers I came across was 25% of all Alt-A were sub-prime. Now for all the others were they telling the truth? There was an interesting legal Blog I read last night that talked about bankruptcy. Under the most recent changes in bankruptcy laws there is a provision that if a person gave false information on a loan application they are ineligible for filing for bankruptcy. After all, then it is deemed fraud. So that could be a variety of things, owner occupied, stated income, assets etc...

Jason Gault, Ortonville Michigan Real Estate A very interesting premise. I see it from a different angle. In the last few years we were getting loads of calls for persons looking for homes or real estate that only wanted free information. When asked if they had an agent, they said no! Our loan officer is providing us the agent. They are kicking back 15K to us at closing.

We assume we are the gateway to homes, since the Internet we are no longer in charge. There are many other scenarios for persons getting hooked up with a less then honest lender, and sometimes it just starts wit the lender first.

For myself, I'd rather not sell a home than put someone into something I knew would be a disaster. Money is not my God. To many it is. I'd rather not do the wrong deal and be able to sleep with my conscience at nighttime...that I live my life with principle. I don't know how a person could have put a person into one of these loans, or homes and have a conscience.

However if the person is of majority of state law, in their sound mind, they are no coerced or under duress and have the ability to obtain the loan, as a real estate agent licensed by the state I am obliged to to assist them...after making full disclosure...if the person wants to proceed - go for it!

Kay Van Kampen, Broker, Springfield Missouri Real Estate The one problem now? The banks are at great risk!

Jim,

Sorry to burst the sensationalism of your post as well as the media's. You've heard about the calamity of Countrywide, haven't you? That has a lot to do with stated income loans. There's no new news here. Alt A is not the next wave of defaults because it's already a part of the mortgage credit crises. The crises is not over, but you make it sound like sub prime was only the tip of the iceberg. Please, don't fan the flames. The sub prime and liar loans nearly disappeared at about the same time for the same reasons. As a 21 year veteran mortgage originator, I was never a big fan of sub prime or liar loans nor all of the idiots (from Wall Street on down) that went overboard selling them to every interested party involved. You may be right about things getting worse before they get better, but no new revelations in your rants.

Larry Penilla

MAR

2008

Larry Penilla I wan't trying for any sensationalism. This is a new story! This is what sparked the sell off in the stock market the last few days. The banks holding the notes are having major issues. Banks can't sell this crap to anyone! The result of almost 20% of Alt-A's falling delinquent in January. So it is new news, and the stories that sparked this are global. On a global level banks holding this portfolios have no buyers to sell them to! It came to a head in the last few days. Check the news stories. They are global!

Jim... a few things. First off, some good points in your blog and in the comments. But sticking No Docs with this statement? What are Alt - A Loans? They are also referred to as "Liars Loans" or "stated Income Loans!" In real estate we know them as "No or low docs." That is because little or no documentation was required to obtain mortgage financing.

Just curious, how can a No Doc be a liar loan? You aren't stating anything, one thing, about their income or job history. Was it greed on the investors part? Yes, possibly. But on the application, the employment part is blank.. white... and so is the income section. This program was all LTV and fico score driven and that's it. I did a few... people with 40% down, high credit scores. And when I say a few, I really mean, only a few.

In regards to everything else that was stated, a lot of it seems pretty close to what is happening. Just curious though, where are you getting your stats and figures from? Not questioning, just curious. I like to have other sources to use in the future.

But overall... it just allowed loan officers to lie... and I blamed the underwriters for not always questioning one's job title with an income that was not normal for that position. I knew some lenders guidelines, even if stated, the income had to make sense with the job title. With stated, many subprime lenders wanted CPA letters to state that they had their company for 3 years, etc etc. Here is where a lot of fraud started. I knew 2 loan officers that were caught in my company from getting a CPA to lie about the clients 2 year history. Then lenders caught on and stated the fact that they would verify the CPA's license. Because several of these so-called CPA's weren't really CPA's, but had letterhead. This was a big problem at one time.... just some information... good discussion here.

Jeff brings up some good points.

I hate the term Liar Loans but I accept that the media needs this affirmation. Without these loans it would be nearly impossible for any self-employed individual with a good accountant to get a loan for any house. When CPA's do taxes, the goal is to show the least amount of income. When underwriters review a loan with full documentation of income, they use these same figures to determine eligibility. Business owners are left out to dry. Rather than see these loans come back, I'd like to see an adjustment to the way lenders underwrite and review tax returns for self employed individuals.

Yes, these loans were used by unscrupulous loan officers to pad their bank accounts and inflate their pipelines. I believe this was a major contributor to the foreclosure mess we're in. We had people buying a $300K house when, based on a 30-yr amortization, they really could only afford a payment for $200K, if that. Now we see these decreases in value down to where they should be. Where honest, hard-working American families can afford the payment for a 30-year fixed rate mortgage. No "liar loans" and no funky amortizations.

I welcome the value adjustment because when it's done, we'll be able to lend safely with responsible mortgage programs.

Jim,

I knew someone who told me they had one of these a few years ago...they told me as long as they paid extra points they were able to get the no doc....it worked and they closed on the loan and made the payments until selling so I guess these are loans that do not require income. would this be considered a smoke screen.

It isn't just the sub prime that is causing problems - because property values are falling every holder of leveraged debt is at risk. The link below refers to a hedge fund collapsing which specifically avoided securities derived from sub prime mortgages:-

http://news.bbc.co.uk/1/hi/business/7270389.stm

The credit crunch is biting hard - central banks are having to pump liquidity into the system to prevent a meltdown - it may well get worse before it gets better.

Jeff Belonger -- The FHA Expert.com -- New Jersey mortgage -- FHA mortgages Thanks for your reply! You shared loads of in sigths. I am getting my sources from the business newswires Wall Street Journal, CNN MONEY, TheStreet.Com Google Business News and overseas business news. I only search most recent and breaking news stories. So before I mentioned almost 20% delinquency rate, I checked with several related stories before I mentioned it. The problem with our industry on all sides? It's in denial! Our next deal is not coming back this year, or perhaps next year. It is going to get a lot worse, before it gets better. I am keeping an eye on Pending Sales for the Atlanta area for February, and they are an absolute nightmare. How low can this get? Stayed tuned.

Kevin Blasi - The Scranton / Wilkes Barre Mortgage Man The problem? It wasn't just one or two bad loans by a few shady characters, 25% of All Alt-A's are sub prime! 20 % are delinquent in January! Whenever I see numbers like 20 and 25% this is much deeper and less of an isolated incident. Do you agree?

Neal Bloom-Realtor ® Assoc.-CRS-Weston FL Yes, there was a bump in the APR for these loans, but at the time they were not exorbitant!

Roger Hollingsworth I also beleive credit has been tarnished outside of these derivitives now and we are seeing a good bit of a domino effect. I agree it is going to get worse before it gets better.

I am a little confused. There were A-paper loans, i.e., loans with strict financial documentation requirements and credit lending guidelines (e.g., good scores, strong ratios, money down, etc.). Then there were Alt-A loans, which had looser financial documentation to help self-employed individuals, but they still had the strict lending guidelines. That's what made them Alt-A, not subprime loans. I don't know, but I don't think the Alt-A loans allowed for 100%, or at least not the Alt-A loans that I saw being processed in the go-go days. Yes, you could pull a no-doc loan with a comparable interest rate as a full-doc loan, but you had to be plunking 35% down. Are you sure that there were Alt-A, 100% loans being issued? There may be higher default rates than before with the Alt-A loans, but these weren't subprime, and the borrowers had to have some good numbers to get them; otherwise they couldn't get an A-paper loan. Do you have a link to an underlying resource?

CNBC has been covering Alt-A loans for some time. I think the problem is only going to get worse. We still have a couple of years until everything will stabilize.

John Hokkanen → Encinitas Real Estate The clue may be in semantics. 100% loans could also be 80/10/10 -- 80/15/5 --80/15/5. It is all borrowed funds. It is not supposed to work this way! All too often in real estate we assume 100% financing is a straight 100% loan. Guess what? Any variation of the loan or loans that equal 100% are a 100% borrowed funds. Our business tries to say...technically these are not 100% loans, but were done so to avoid PMI. Years ago the way you avoided PMI by putting down 20 or 30%. That 20 or 30% is now comprised of more credit! No matter how you look at it, most persons do not have their own money in most deals! Who holds all that paper? The banks! Sorry folks. If there was ever an example of "one bad apple spoiling the entire barrel" this is it! Credit to buy became the norm, but we are in a major credit crunch! Cash is going to rule for some time to come. The disaster come when you combine a lot of these issues into a mortgage nightmare cocktail of adjustable rate mortgage, pre-payment penalties, no PMI to cover the bank for loss, no escrow accounts for taxes etc...see where this goes?

Brian Kreick I agree, and I know it is going to get a lot worse. Put it this way, I do not want it to get worse, I want it better! As long as we have ineffective leaders at all level of government that can line their pockets with lobbiest money from banks, mortgage companies, REALTORS, builders developers, investors...than there is no way we can ever fix this. It will always be about them as opposed to "We the People!" Politicians must realize that they can not hide from their own actions in any party. They are responsible for their actions, and accountable to those they serve. We exercise our right to set the record straight in the voting booth! We have an obligation to start calling our Government at every level and complain! It is our civic duty, and God given right as citizens of this soon to be once great nation!

I agree that it's not an isolated incident. That's why I contribute the unjustified increase in values on these particular kinds of loans. There were many loan officers and Realtors pushing these loans to increase commissions and purchase prices.

Any loan with three seperate LTV's, such as an 80/15/5, refers to a situation where there is earnest money down payment. This would be an 80% first, 15% second, and a 5% down payment. The borrower certainly had a cash position in these loans to lose. That was one reason that lenders took the extra risk. Not anyone with a pulse could get these loans. You had to have much better than average credit and a cash down payment.

I'm intrigued that you turn a finger to the politicians when they are the ones making knee-jerk policy decisions that threaten to put us on the unemployment line. Now, I don't disagree that our leaders are inept, but I don't see them as a proponent of these lending decisions and the policy of Alt-A banks. Politicians are the last people we should be leaning on to make smart decisions regarding the real estate industry. They have no idea. The problem is that the pressure they are under from their constituents forces them to create policy even though they have no idea what they are doing. We will all suffer if the real estate correction becomes the responsibility of the government.

Kevin Blasi - The Scranton / Wilkes Barre Mortgage Man In regard to these loans Alt-A The politicians did play a major role in them. Not in the loans themselves, but in the securitization of these loans. In 1933 as a direct result of banks failing due to foreclosures, and banks mixing securities with real estate the US Congress passed the Glass Steagall Act and then the 2nd Glass-Steagall Act. This protected the economy very well. In 1999 President Clinton had the Glass Steagall Act repealed and replaced with the Gramm-Leach-Bliley Act which allowed once forbidden mergers and associations and investment grouping to take place. An example of this - Citibank merging with Traveler's Insurance Group and forming Citigroup. These cross mergers are today referred to as the as the financial services industry. So there is a lot of cross pollination going on, but the biggest item was the securitization as investment of mortgages. Securitizing assets that are illiquid and turning them into investment instruments. This is what is strangling the world right now. So I go right back and blame the politicians and their greed for knowingly changing the banking laws. You cannot change the law, a Realtor cannot change it, a buyer or a seller does not write law...it is in the politicians court! We will pay dearly for this for years to come!

As far as the buyers having other assets? It wasn't so unusual in the past few years to see buyers tap into IRAs, what if the asset base that was used were also illiquid? We need to think about this, it is too late now to ask a lot of questions, but we need to know. They can never do this again!

Well, this is great timing. I had just looked at the map of foreclosures. I thought it looked bad already. I guess we'll see what the future holds.

Christy Powers - Pooler, Savannah Real Estate Agent Hey Christy! This is just the beginning. There are over 500 billion in mortgage resets this year. That is 10 times more than last years 50 Billion!

APR

2008

Jim I do agree many of these loans will come home to roost. However I do fell there is a place for them especially in the self employed community.

Jason & Deanna Long Breckenridge Real Estate Yes but they cannot be dispensed like PEZ. PEZ

Yes I do agree,

Lending standards and underwriting became to loose the last few years.

Jason & Deanna Long Breckenridge Real Estate Way too loose! It will hurt self employed for a while!

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Jim Crawford ~ Atlanta Real Estate-ABR E-PRO

Atlanta, GA

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