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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