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

By
Real Estate Agent with Crye-Leike REALTORS® 165062

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.

Jim Crawford

 

 

 

 

Subscribe To Our Atlanta Real Estate Blog in a reader

Subscribe Now!

...with web-based news readers. Click your choice below:

addtomyyahoo4Subscribe in NewsGator OnlineAdd to My AOLSubscribe with BloglinesAdd to netvibesAdd to GoogleOutpost

Posted by

James Crawford ABR, Broker Associate

 

 

 

 

Atlanta Real Estate | Atlanta Homes for Sale - Call Now!

 

678-595-5283 Direct

 

What's My Home Worth?

 

Jim Crawford Crye-Leike REALTORS® AtlantaAtlanta Real Estate AgentsAlpharetta GA Homes for SaleAtlanta Luxury Homes, Dunwoody GA Homes for SaleAtlanta Real Estate &  Atlanta Homes for Sale,  Gwinnett Homes for SaleAtlanta Real Estate BlogCumming GA Homes, Decatur GA Homes for Sale.   

Atlanta Homes for Sale | Atlanta Listing Agents | Atlanta Buyers Agents

 

Atlanta Real Estate for Sale

 

Buying A Home

 

Selling A Home in Atlanta

 

Atlanta Real Estate Agents - Contact Us

  

Jim Crawford Atlanta Real Estate Social Media icons

Search Listings

Search By
City
Type
Price -
Beds/Baths /
 
 More Options
 Map Search
close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Groups:
RE/MAX Active Rain Bloggers
Tags:
alt a loans mortgages delinquencies liar loans stated income loans defaults banks portfolios subprime no doc low doc no documention

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Ambassador
749,610
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

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 belonger
Feb 29, 2008 05:07 PM #33
Rainer
18,951
Universal Funding Partners
Universal Funding Partners - Scranton, PA

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. 

Feb 29, 2008 06:29 PM #34
Rainmaker
593,057
Neal Bloom
eXp Realty - Weston, FL
Realtor CRS-Weston FL Real Estate

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.

Feb 29, 2008 11:28 PM #35
Anonymous
Roger Hollingsworth

 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. 

 

Mar 01, 2008 12:46 AM #36
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

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.

Mar 01, 2008 02:12 AM #37
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
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?
Mar 01, 2008 02:18 AM #38
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
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!
Mar 01, 2008 02:20 AM #39
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
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.
Mar 01, 2008 02:21 AM #40
Rainmaker
30,937
John Hokkanen
SurfTheTurf.com - Encinitas, CA
Encinitas Real Estate

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?

Mar 01, 2008 02:40 AM #41
Rainer
24,010
Brian Kreick
Willinger Real Estate - Wenatchee, WA
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.
Mar 01, 2008 03:07 AM #42
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

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?

Mar 01, 2008 05:52 AM #43
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

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!

Mar 01, 2008 06:00 AM #44
Rainer
18,951
Universal Funding Partners
Universal Funding Partners - Scranton, PA

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.

Mar 01, 2008 08:12 AM #45
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

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!

Mar 01, 2008 11:05 AM #46
Rainer
122,167
Christy Powers
Keller Williams Coastal Area Partners - Pooler, GA
Pooler, Savannah Real Estate Agent
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. 
Mar 01, 2008 01:26 PM #47
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
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!
Mar 01, 2008 01:41 PM #48
Rainer
36,005
Jason & Deanna
Breckenridge, CO
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.
Apr 01, 2008 10:44 AM #49
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR

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

 

 

 

 

 

Apr 01, 2008 10:49 AM #50
Rainer
36,005
Jason & Deanna
Breckenridge, CO

Yes I do agree,

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

Apr 01, 2008 10:54 AM #51
Ambassador
1,485,851
Jim Crawford
Crye-Leike REALTORS® - Atlanta, GA
Jim Crawford Atlanta Best Listing Agents & REALTOR
Jason & Deanna Long Breckenridge Real Estate  Way too loose!  It will hurt self employed for a while!
Apr 01, 2008 11:00 AM #52
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Ambassador
1,485,851

Jim Crawford

Jim Crawford Atlanta Best Listing Agents & REALTOR
Contact Me Now!
*
*
*
*
Spam prevention

Additional Information