Moody’s Ominous Alt-A Warning – Mortgage Implosion Round 2

Posted on November 18th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Moody’s recently put out a very chilling report that brings home just how early it is in the overall mortgage and housing implosion.

Many of us have written volumes on the impending Alt-A Implosion.  But, I still don’t think people understand that the Alt-A universe, larger is size than SubPrime, is presently imploding in front of our very eyes.  Unlike Subprime loans that were more localized to specific regions of the bubble states or lower priced areas, Alt-A loans cut across all socio-economic boundaries and can be found littering some of the most affluent areas in the nation.

For those of you who think that higher priced regions are ‘isolated’ from price declines just because they have not been beaten as badly as Subprime epicenters yet, this should be a wake up call.

The ‘Alt-A Implosion’ could dwarf the Subprime Implosion when all is said and done.  This is because values in higher-priced, heavy Alt-A areas should actually end up being hit harder, as Alt-A loan allowed much more leveraged and much less documentation than Subprime relying mostly on a credit score and an appraisal for loan approval. Within the Alt-A universe is where all of your stated income, no ratio, no doc, 100% piggy-backs can be found. The most notorious Alt-A loan is the Pay Option ARM.

The way all of these loans were structured is producing a very linear mortgage crisis – from Subprime to Alt-A to Jumbo-Prime then Prime.  Jumbo Prime is arguably a little less risky than Alt-A but includes much of the same types of loans such as the 5/1 interest Only. Much of this was also stated income, allowed high combined loan-to-values and carried low introductory teaser rates.  With values down as much as they are in the Jumbo regions, I would suspect that Jumbo Prime will end up acting much more like Alt-A in the future.

The coming Alt-A and Jumbo Prime Implosions puts at risk well over $1 trillion in residential mortgage loans, much of it sitting on the balance sheets of some of the nations largest banks such as Wells Fargo, Chase, Bank of America and Citi.  It will also take out of commission the higher income demographic for a long period of time.

At the very bottom of this post are many links dating back months on just how devastating the Alt-A Implosion will be. This is likely why banks and regulators are so gung-ho on mortgage modifications as of late. None have the balance sheet to manage high double-digit default rates on what they still consider to be ‘high grade’ loans.

Below are highlights from a recent release from Mortgage Daily. -Best Mr Mortgage

Alt-A Performance Sinks
Serious delinquency spikes on 2006, 2007 vintages
November 17, 2008
By MortgageDaily.com staff

Rapidly deteriorating performance on Alternative-A loans is prompting one ratings agency to warn that widespread downgrades are possible on Alt-A residential mortgage-backed securities.

As of October, delinquency of at least 90 days on Alt-A loans backing securitizations averaged 20.3 percent on the 2006 vintage, rising from 16.9 percent six months earlier, Moody’s Investors Service reported today. For the 2007 Alt-A vintage, delinquency averaged 17.5 percent last month, rising from 12.2 percent.

But Moody’s said prepayment rates are at historical lows — averaging in the mid to high single digits — and are expected to remain depressed in the near term in light of a tight credit environment and declining home-equity.

“Given the lack of pool seasoning, cumulative losses have not yet risen as steeply as delinquencies,” the ratings agency stated. “However, many pools are starting to show a sharp increase in the rate of loss realization. As the pace of liquidations has picked up, the performance data suggests worsening loss severities.”

Alt-A loans with subprime credit are performing worse than those with near-prime credit.

Moody’s noted that when Alt-A loans include an option adjustable-rate mortgage, delinquency outpaces that of pools without option-ARMs. This was attributed to weaker loan-to-values caused by negative amortization.The New York-based firm said it plans to review ratings on Alt-A transactions over the coming months.

Given the marked deterioration in recent performance, the expectation is that there will be further negative rating actions and in some cases, multi-notch downgrades,” the announcement said.

More on Alt-A

22 Responses to “Moody’s Ominous Alt-A Warning – Mortgage Implosion Round 2”

  1. MrM- do you believe that the current mortgage mod efforts will affect the over all “Alt-A implosion”? Or will such efforts be so minimal (or unrealistic) that it’ll merely be a drop in the bucket?

  2. Mr. M – Are the 40 year loans being offered now along the lines of the 60 year loans given in Japan during their housing bubble crisis? Do you think our gov’t will try multi-generational loans to try and prevent this fiasco?

  3. Thought you may find this interesting:

    Wayne County Foreclosures Nov2008
    http://youtube.com/watch?v=ufexZnViDiU

    (137 pages in the Detroit Free Press)

    Thanks for all the info you provide here and at Tickerforum.

  4. there is no escape.
    house prices will continue to go lower and lower.

    before this is over there will be revolution

  5. I am certainly not a proponent of government price controls, but the more I read about the housing problems and see friends and neighbors of mine struggle to get by, it makes me wonder if selective price control would be such a bad idea. I would never support price control of any kind when it comes to luxury items, but controling the price of necessities such as food, shelter, gas, etc. seems to be a sensible idea. I believe that NYC has certain rent control laws which restrict the amount a landlord can charge for rent in order to keep people from leaving the city due to extravagant costs. I don’t think that it is beyond the realm of possibility to devise a formula which produces the maximum amount a home can be sold for from year to year. Consider lot size, square footage, and zip code to determine what maximum price point can be set and allow that number to increase based on the state of the local economy. A program like this would certainly have prevented the IE from increasing in price as fast as it did over the past few years, and would have prevented such a drastic decline as well.

    If we had a program like this, I am confident that people would move much less often and provide significantly more social and economic stability. Growing up, we only had one family on our street move out in 20 years. The price of the homes was low enough when they were purchased to encourage people to stay long term. I can’t express how great it was to have the same neighbors and friends on our street for my entire childhood. It really brought a sense of unity and closeness to the neighborhood which you just don’t see today. The kids in my neighborhood could play outside all day and night without our parents feeling uneasy about it because they knew everyone and people looked out for each other. That just doesn’t happen today because the neighborhoods are simply too fluid. My subdivision today seems to have people moving in and out every week. My kids don’t want to make close friends because they know the friendships are very likely to be temporary at best. And my wife and I don’t know the neighbors/renters/investors who are constantly coming and going well enough to leave the kids outside unsupervised for long periods of time. It just sucks to see how insane greed and shortsightedness by buyers and sellers has affected the social and economic fabric of suburban neighborhoods today.

    I’ll get off my emotional soapbox now.

  6. After 30+ years of watching my credit score, paying ever bill on time, and doing everything the right way…I can’t believe I am now thinking of walking away from my Alt-A house. Of course at midlife, I never expected to be trashing my credit but that is where I find myself. At the time of my Alt-A refi from a traditional 30yr., I thought I was getting into something that had the opportunity to make my future retirement easier, but didn’t realize the house of cards all of this real estate bubble was built on.

    I am waiting to hear from my lender after filling out all the re-mod papers and having the appraiser out. If all of the lenders are scared of this Alt-A implosion, I haven’t gotten any sense of urgency on their part. In fact, I am assuming that they will try and re-mod me into a loan paying more than my pick a pay loan I have now. They will say that it is a better deal, with a 30yr fixed with no neg am. They better find a way to lower my payment as well, because I would rather trash my credit, than pay on an upside down loan for 30 years/with a huge 0% coupon note attached starting in three years.

    If I am thinking about walking away, with the degree of caution I have used over the years with my credit, than the banks have a real problem with the rest of the Alt-A universe. That is why I have heard that many people are turning down the re-mods. The banks better get a handle on this or they will all be with us homeowners, uo the creek!

  7. Price fixing is the worst thing the government can do. I will never, ever buy a house if there is any kind of price fixing involved. Why would I? It would only appreciate by whatever the government thinks is appropriate. I would buy property in a different country instead, where there was NO price fixing.

    The free market has the capability of providing strong stability to pricing. Supply and demand works quite well! It’s when you start to fiddle with the fundamentals that things start to go crazy. These price corrections that we are experiencing now are NECESSARY. The foreclosures going on now are NECESSARY. The bankruptcies going on now are NECESSARY. Without any of this, we will NEVER recover.

    I did my homework, never bought more than I could afford, and am now waiting for the right time to strike. I have spent the last 3 or so years moving my chess pieces into place. It’s almost time to call it all in.

  8. Nothing can stop this – and if consumers really think about what they are doing, which is becoming renters for life with any one of these new mortgage mod plans, they will walk away and rent.

  9. Wow, just be careful of what you sign up for on the modification. This is what you will need to be qualified for a modification.

    1. You must be AT LEAST 90 days delinquent.
    2. This must be your PRIMARY residence.
    3. You must owe AT LEAST 90% of your homes value (owing more than it is worth is OK).
    4. Have DOCUMENTED income.
    5. Your mortgage MUST BE owned or guaranteed by Fannie, Freddie or a participating loan company.

    If you qualify they will rework you into an affordable loan of 38% of your gross pay.

    Here are some of the things they will be trying to rewrite to get you to that 38% level.

    1. Interest rate reduction to as low as 3% (if this rate is BELOW market rate then in 5 years it goes back up to whatever the current market rate is).
    2. Reduction of principle (unpaid principle will be tacked onto the back end of the loan and also is DUE upon a sale or refi).
    3. The reduction in principle can ONLY be reduced to 100% of current market value.
    4. Increase your loan terms to 40 YEARS.

    If this still won’t get you there then you are out of luck in qualifying for the new program, but alas you may now qualify for a customized deal. I don’t even want to know what that entails…

    So are you ready to sign up for a new mortgage? A new 40 year loan that appears more like a 5/35 @ 3% resetting to who knows maybe 7% or more in 5 years with a balloon note of 10’s of thousands of dollars perhaps on the back end? Oh, and if you want to move or refinance then you must pay the balloon note or you can’t do it.

    I don’t know about you, but I would never sign up for this so called deal. It is more like a prison term if you ask me. If you walk now the average credit hit is for roughly 4 years. In 4 years we may be just pulling out of this mess. So when you will need good credit once again you will have it. Until then you have your life back. Just don’t squander it away and get set up for 4 years from now with good credit and money in the bank. Your getting a second chance which the law allows for, but don’t look at it as a free ride. This is serious stuff and a lot of people are getting badly burnt in these deals being offered in my opinion.

  10. “I did my homework, never bought more than I could afford, and am now waiting for the right time to strike. I have spent the last 3 or so years moving my chess pieces into place. It’s almost time to call it all in.”

    You are so full of it. Your so-called “homework” has either been luck or you had information that was not available to the average person.

    Not everyone who is at risk of foreclosure lied about income, shopped for a home they could not afford, or the like. They trusted the institution granting them the loan, and expected to be given factual information about the loan product.

    We purchased our home with a 30 year-fixed mortgage in 2002. In the summer of 2005, after literally hundreds mail and telephone solicitations, I decided to hear them out. It seemed like the right thing to do. We didn’t take money out, we did finance the fees and costs, but that was all we added to the loan. We’d be able to save for our children’s education, our retirement..IT WASN’T UNTIL WE GOT OUR FIRST LOAN STATEMENT that we knew our loan was NEGATIVELY AMORTIZING. The product was NOT a “teaser”..the “teaser” was only a PORTION of the true interest rate..which adjusted higher every single month. The only thing fixed about it was the teaser portion of the interest rate. Well why not refinance out of it you ask? Because there is an outragous prepayment penalty. So we did our best to pay the full interest-only (the one that adjusted every month) payment, until we just could not afford it – then we started paying the teaser option payment, which added to the principal balance (but didn’t add any more to the principal than the pre-payment would have)- thinking we’d refi after the prepay fell off. Well that never happened because our home (in NV) has lost 40% OF IT’S VALUE and we are left unside down (and climbing). We just got the notice we have been dreading – our loan will recast and we will have to pay $2200/mo on a $220k mortgage..on a house that is worth $136,000.

    Our mortgage company is/was IndyMac Bank. I keep reading about IndyMac’s “catalyst loan modification program.” Ha! They are not modifying ANY pay-option arms owned by investors. None. How in THE HELL is Sheila Bair continuing to claim IndyMac’s new loan modification program should be the example for all other banks. We have even retained Green Credit Solutions to no avail so far..

  11. dafox: “do you believe that the current mortgage mod efforts will affect the over all “Alt-A implosion”?”

    I wonder about this as well. I’m 90% sure there will be no Government bailout candy for these folks. Fan&Fred’s temporary 725K ceiling is going to drop to 115% of local MSA median on Jan 1st. Likewise FHA Hope for Homeowners is capped at a level WAY too low to save So Cal Jumbo borrowers. No-docs probably won’t be saved since half of them were fraud in the first place (borrower exagerated income). Another way to think of it: it’s going to be next to impossible, politically, to convince fly-over state representatives that the government should extend its bailout efforts to cover million dollar coastal mortgages and people who can’t produce a tax return showing where their money comes from.

    So the only question is: what will the banks do? There my crystal ball is cloudy. My hope is that they do what their contracts with the holders of their mortgage-backed securities require: (in most cases) make a risk-reward analysis of foreclosure vs. loan workout and choose the one that maximizes return on the investment.

    Partyboy:

    Step away from the koolaid, Partboy.

    Government enforced price controls are:
    1. unfair (but I suppose, for proponents, that’s the point).
    2. full of unintended consequences (undeserving people gaming the system, price distortions outside of the target market, misallocation of capital, etc., etc.)

    Wow in Ca:

    Good luck (sincerely) with your loan workout.

    Alex:

    we’re totally on the same wavelength.

  12. admin Said:
    November 18th, 2008 11:09 am
    Nothing can stop this – and if consumers really think about what they are doing, which is becoming renters for life with any one of these new mortgage mod plans, they will walk away and rent.

    Mr. M,
    But can the Banks delay it? What is your time frame for this implosion?
    Thanks.

  13. PartyBoy

    With regard to rent controls in NYC, Thomas Sowell has a very nice essay regarding that issue in his book “Basic Economics”. Please read it. As an owner of rental property I promise you that if I was told what I could rent it for I would NEVER replace the old, single pane windows (which I did last week), put on a new roof (last fall – different house) or the new dishwasher (last Jan) or any of the other numerous improvements I’ve made to make my properties desirable. You can verify that this strategy is the normal MO for rent-controlled properties in large cities with little effort. If you controll my profits, I have no choice but to make it up on the expense side.

  14. Here in San Diego, the sub-prime market has been beaten down hard. Condo’s that went for $300,000 now go for $130,000. Now the inventory for the highest price zip codes are exploding. Coronado, Del Mar, La Jolla have 18 months inventory. But, Rancho Santa Fe has 33 months. These multi-million dollar homes with multi-million dollar mortages will come crashing down as the payment goes up thousandands of dollars and the recession hits their income. Although all markets have been down, the bottem end has been hit the hardest. The upper end will be next and the middle priced homes will get theirs too, as they are blasted by the Malachi Crunch!!!!!

  15. Alex,

    “The free market has the capability of providing strong stability to pricing. Supply and demand works quite well! It’s when you start to fiddle with the fundamentals that things start to go crazy. These price corrections that we are experiencing now are NECESSARY. The foreclosures going on now are NECESSARY. The bankruptcies going on now are NECESSARY. Without any of this, we will NEVER recover.”

    While it is true that the free market is CAPEABLE of providing stability to the market, the past few years have shown that is also capeable of incredible financial destruction if not operated in an ethical manner. The price corrections we are facing right now certainly are necessary, but the creation of the problem in the first place was not. This problem has a lot of blame to go around, but regardless of who you blame, the root cause is greed. I just don’t feel that greed is something that should be allowed to interfere with basic necessities.

    In fairness, a 3000 sq ft home is not a necessity, but when that house is selling for $500k, the 1500 sq ft house goes up in price, as does the 2-bedroom apartment, and this trickle effect makes the cost of shelter too much for most people to bear.

    In regards to the free market, did you feel the same way about the price of gasoline when it was up around $5/gal? If you want a truly free market, then I suppose we should eliminate anti-trust laws and allow monopolies to dictate prices. Just imagine if electricity rates were not mandated by govt agencies. If you were paying $5/kw-hour would you still use electricity? Of course, but it would eliminate your ability to buy anything else at all and would destroy the economy. I agree with your views of an open market, just not when it comes to actual necessities.

    By the way, congratulations on being yet another anonymous financially savvy person who saw this whole thing coming and avoided drinking the kool-aid. I hope you are able to maintain your views when all of your neighbors walk away from their homes in the next few years and you are partying it up with squatters.

  16. Stu that is not correct on the modification. It sounds like to are talking about the new HOPE program. On the Mod loan they just lower your rate on many different programs that you get to choose one of them.

  17. Mr.M, thanks as always for the great information and insight. I recently watched an online panel discussion hosted by The American Enterprise Institute for Public Policy Research. A good watch if you have the time. Titled: The Deflating Mortgage and Housing Bubble, Part IV: Where is the Bottom?

    http://www.aei.org/events/eventID.1813,filter.all/event_detail.asp#

    One of the presenters, Mr. Thomas Zimmerman of UBS Investment Bank painted a somewhat different picture as far as how nasty things will get in the next few quarters. Leaving aside the a typical “investment banker” bashing, do folks here think this gentleman’s assumptions are sound?
    (helpful to go through his slides as he speaks, note slide 15 in particular)

    Much appreciated.

  18. wondering why:

    Trying to pick the exact date of the bottom is a fool’s game (or an economist’s game). I think that eventually we will revert to historical averages in terms of price/rent and price/income ratios. Looking at Zimmerman’s graph on page 7, that would be when we return to the 2.5-3.0 range for price/income that prevailed pre-2001. We still have a way to go!

  19. Partyboy, you are correct, this does tie directly to greed. There is absolutely no doubt about that. However, the government is not here to protect us from our own greed. Prior to the bubble, the the median income supporting the median price of a home. Enter the bubble, where the median income went no-where, yet the median home “value” tripled. Excited, home owners then refinanced their properties and purchased depreciating assets or spent the money carelessly, expecting the value of the home to keep going up and continue on the refi cycle.

    Now, the piper has come and needs to be paid, and surprise, no one has the money. So, now that these people have spend themselves into foreclosure and bankruptcy, the government has to step in and help them? No way!

    Apartment costs in my bubble state didn’t skyrocket. In fact, most things did not skyrocket, just the price of real estate. Plus, those who decided not refinance their mortgages and take cash out are still sitting on the same mortgages they have been since before the bubble. Those people are not losing their homes, unless some other force acts on them. As well, their home isn’t really “losing value” because of the properties around them; the value was trumped up to begin with. It’s just coming back down to earth.

    When you start talking about electricity, natural gas, water and sewage, trash pickup, yes, I think government should be involved. But housing? Are you saying the government should set the price on what a waterfront property would cost, versus a property that is in a marsh? What about a property on a mountainside versus a property in a valley? Properties next to malls versus being 50 miles from a mall? Properties in farming areas versus properties in skyrise buildings downtown? I think that’s ridiculous. Electricity and water are electricity and water. Housing is a whole different matter.

    I am sorry you are bitter about not seeing this earlier. I am not financially savvy. All it takes is basic math, and I can do that.

  20. Alex,

    I certainly agree with you regarding people who took out HELOCs having to pay the piper. But I would disagree that this is the case with most people in trouble today. The HELOCs were made possible by fraudulent flippers who were using straw buyers and dirty loan officers who drove up the prices by inflating prices with their cash out purchases for tens, and even hundreds, of thousands of dollars above market price. This caused a large panic for people who were getting ready to buy a home. Most people thought that if they didn’t then, they would be priced out of the market for good. Then the homebuilders rode this wave and preyed on the panic people were feeling to justify their ridiculous prices. The banks cooperated by offering creative financing and ignoring documentation.

    I’m not saying that we should bail out people who have already gotten in trouble, but it is something to consider moving forward. And I can understand why you don’t relate food, water, electricity, etc to housing, but the bottom line is that they are ALL necessities. Setting a price range is not out of the question. It may not work to set a specific price, but it would be reasonable to say that the selling price cannot increase more than a certain percentage per year. This way you could still have equity building up in your property but it would virtually eliminate flippers and would maintain an appropriate ratio with wages and inflation which would be a step towards long-term market stabilization.

    Now as to whether the govt should step in and help people, that’s a tough one. On the one hand, fraudulent buyers should not be bailed out at the expense of prudent citizens. But not bailing them out will likely have trickle down effects which will be significantly worse. On this, I think we will have to agree to disagree. I wouldn’t have any problem with the govt bailing people out and stablizing the market because I think that it would stimiulate the economy, and lower the stress levels for strapped families. This is an impact I feel has yet to rear its ugly head but will be significant. Family relationships absolutely must be strained right now with the money problems most of them have. If this results in marital fights, abuse, less time with kids, etc, I think it will have a much more lasting and drastic impact on this country than the financial impact of a bailout. Just my opinion.

  21. I know most of you are from the Western US. However, I am in the South. We had over 4000 foreclosures in my county during 2007 and will have over that number in 2008. The deal here was 100% financing of no-doc loans to first time homebuyers. The loans were split 80% 20% as to avoid MIP. Most do not have escrow accounts. The people moved into there $150-$175M brand new homes and promptly furnished them on credit. The first Property Tax bill came due and they did not have the money!! Remember No Escrow. All now vacant.

    Also, Some of the people never even made the first payment because they were flippers. They closed, moved in and put the house back on the market because some realtor said they would make a quick $10M.

    We have whole neighborhoods that are empty, thousands of low end homes just sitting and rotting. Greed caused these problems.

    Then on the other end of the market, $500-800M homes were selling like crazy, so the neighbors that had been there a couple years refinanced and took the cash out thinking there house would continue to appreciate since all the new homes were selling like hotcakes. They spent the money on cars, boats, second homes etc. Greed again.

    None of these people deserve my tax money. Let the market work this out. Housing prices must come down. I too lived in the same house all my childhood and parents only moved when they were old. This is what homes are, they are HOMES not investments. If you make a little money when you sell thats great, but the family home is precious.

    Stop all the bailouts!! This is all a joke, Freddie and Fannie are broke, and if this continues the USA will be a third world country.

  22. Wow in CA

    Whatever you do on a re-mod – check that there is no clause making the mortgage “recourse”. This means they can chase you for the balance for years to come. Long after they have repossessed and sold. A non-recourse loan – you can mail back the keys!

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