Housing Bubble Bursting for Alt-A’s?
Fester warns that, just when you thought that the bursting of the housing bubble was confined to those who took on risky “sub-prime” loans, news comes out that there may be a problem with with the “Alternative A” or “Alt-A” loans, which “account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.”
He believes this may have serious consequences:
As credit standards continue to tighten from absurdly loose to only loose, rolling over bad decisions and loans will not be viable in the future. There are three remaining options. The first and most preferable is for a crunched borrower to find someone to sell their property at a high enough value to get them out of their obligations with minimal damage. The problem here is that housing inventory is still expanding and plenty of people are just as or more desperate to unload their houses as any individual seller. So getting a price that is sufficient, after transaction costs, to pay off a bubble mortgage will be tough. The next preferable solution, and most likely the most common solution, will be for crunched borrowers to suck it up, and try to outlast any housing price downturn while still paying their mortgage and carrying costs. The final solution is for an increase in foreclosures to increase as people walk away from disasters.
Indeed, if you’re in a house you paid a million dollars for two years ago and it’s now worth $800,000, that last option may be all that’s left to you. If you got in without much of a down payment–which presumably most Alt-A borrowers did–it likely won’t be that ruinous.
Of course, if it’s a second or third home that you bought in hopes of flipping in a few months at a profit–which is apparently the case with a substantial chunk of this class of borrowers–it’s a crushing blow. But then that’s the nature of high risk, high reward ventures.