New Wave of Alt-A Foreclosures to be Worse than Subprime Wave

jclarksnakes said:
clifp said:
Let me try this again.
clifp,
...So how is that working out for Fannie and Freddie? Seems like I heard something about them coming onto hard times. And how come I hear about so many people geting conventional mortgages with way less than 20% down? Are those conforming or not? There sure are a bunch of them. My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service. Their company has a bad month or two and cuts back hours and they are in trouble. I appreciate that you are being a good sport here.
Jeff
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________________________________
Fannie guidelines

Cashout refi:
debt to income - 65% max
Loan to value - 90%

Rate and term refi:
debt to income - 65% max
Loan to value - 95%

Purchase:
debt to income - 65% max
Loan to value - 95%

Mortgage insurance reguired over 80% loan to value. A year ago you could get mortgage insurance with a 500 fico. Now you need a 660.

________________________________________________

If you have 660 FICO, getting a loan is rarely an issue. Most under 660 borrowers have no options outside of FHA.
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jclarksnakes said:
...So how is that working out for Fannie and Freddie? Seems like I heard something about them coming onto hard times. And how come I hear about so many people geting conventional mortgages with way less than 20% down? Are those conforming or not? There sure are a bunch of them. My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service. Their company has a bad month or two and cuts back hours and they are in trouble. I appreciate that you are being a good sport here.
Jeff
Click to expand...

Much to my surprise -- and I inadvertently blabbered wrong information in another thread -- Fannie has had some exposure to subprime lending. Evidently, an article in this week's Washington Post indicated that Fannie purchased a lot of securitized subprime loans. But this exposure is not the major reason for Fannie's problems today. Oh well, a 20 percent down payment with a 40 percent debt to income ratio, strikes me as a good credit even if it might not be conforming, which I think is the definition of a Alt-A credit.
 
jclark--A couple points. the 40% back end ratio isn't really the problem. 40% or 10% it doesn't matter. If the person spends everything they have left over when they suffer a financial set back they can't afford either debt. I think the bigger issue is the ARM's. If the person is doing everything correctly, except for getting an ARM they are in trouble. Invariably the rate resets higher, now instead of having a 40% back end they are up to 45, 50 or 60% back ends. That gets very tight for the average worker in the US. If they had taken out a fixed rate mortgage with a back end of 40% their payment isn't going to adjust by too much year over year and the 40% would be manageable and probably start dropping as they receive pay raises and pay off other credit accounts.
 
jclarksnakes said:
clifp said:
clifp,
...So how is that working out for Fannie and Freddie? Seems like I heard something about them coming onto hard times. And how come I hear about so many people geting conventional mortgages with way less than 20% down? Are those conforming or not? There sure are a bunch of them. My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service. Their company has a bad month or two and cuts back hours and they are in trouble. I appreciate that you are being a good sport here.
Jeff
Click to expand...

As others have pointed Freddie and Fannie problems for the most part don't stem from conventional mortgages (20% down, fixed back end ratio <40%). Even ARMs per-se don't cause a major problem since the rates have been pretty stable. (Depending on the index and when the ARM was taken the interest rate could have actually dropped) The problem was
all the creative and in hindsight crazy ways lenders stretched the safety limits of conventional lending practices, teaser rates, Option ARMs... Yes Freddie and Fannie were complicit in helping out, by securitizing increasingly dodgy debt.

It seems to me there is "holy trinity" of lending; sufficient collateral, ability to repay, and propensity to repay. Banks can be can be flexible on one of the criteria so for example requiring less than 20% down, providing teaser interest rates, or lending to people with less than perfect credit history.
The problem was that all too often lenders eased up on all three criteria simultaneously, leading to nuttier loans, like 95% LTV, Option ARMs to people with 500 FICO scores.

The good news with housing pricing coming back to earth is that people with modest income can now afford houses with traditional mortgages. Which was the point of my original post about my niece.
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people with modest income can now afford houses
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clif, am I gonna hafta smack your knuckles with a ruler? :) ;)

Listen to Mr. Snakes:
My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service.
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I still think 40% is a big number as well. Maybe we'll just have to agree to disagree..
 
"I still think 40% is a big number as well. Maybe we'll just have to agree to disagree.."

Probably depends on what of the country (or what country) you are from (where did you live in the states). Living almost my entire life in LA, Silicon Valley, and Honolulu, virtually every homeowner I knew (including everybody in my family) at one point or another had mortgage payments ~40% of their income, in fact I knew and know several single mom who's debt to income exceeds 50%. All but one person pulled it off, and the one person who didn't could have afforded it but he wanted to quit being an engineer and become a photographer, so he mailed the keys to his upside down house to the bank and left town. This was almost 20 years ago.

I will agree that 65% debt to income level that fannie allows is too high. I am glad they will probably lower it to 50%.
 
I was born and lived 40+ years in the Northeast. Started out in a frugal zone and spent 1/2 my time there.. moved to a somewhat "zoomier" zone but still with a healthy contingent grounded in reality. I guess if I'd grown up in LA or similar reality would just be a state of mind. Not so where I was raised. Frugal Yankees + people from "the old country" = don't stick your neck out.

40-50% raises my hackles. For most people this is almost entirely interest they are paying. It takes years to even begin to make any kind of noticeable dent in the principal/real equity.
 
ladelfina said:
For most people this is almost entirely interest they are paying. It takes years to even begin to make any kind of noticeable dent in the principal/real equity.
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Finance a 30 yr mortgage and this is a true statement regardless of debt to income ratio.
 
ladelfina said:
I was born and lived 40+ years in the Northeast. Started out in a frugal zone and spent 1/2 my time there.. moved to a somewhat "zoomier" zone but still with a healthy contingent grounded in reality. I guess if I'd grown up in LA or similar reality would just be a state of mind. Not so where I was raised. Frugal Yankees + people from "the old country" = don't stick your neck out.

40-50% raises my hackles. For most people this is almost entirely interest they are paying. It takes years to even begin to make any kind of noticeable dent in the principal/real equity.
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The idea of paying 40%-50% of my salary just for a house freaks me out, too. My house payments (including tax and insurance) were 20% of my gross income when I first bought it, and due to salary increases only 16% by the time I paid it off four years later. To people in California this must sound like a mortgage fairyland.

It is amazing how much extra payments to the principle decrease the time left on the mortgage, when done early. I don't see how someone paying 50% could make extra payments very often. I probably paid a greater percentage than they did, in order to pay my house off quickly, but it was voluntary and in four years I was DONE.
 
Last edited:
Finance a 30 yr mortgage and this is a true statement regardless of debt to income ratio.
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and your point is? Yankees and people from the old country tend to want to stay put and would never put themselves in hock for 40%. People in LA/Silicon Valley/Honolulu who knows?

If my debt/income ratio is under 30% (maybe it's 20% like W2R, or even 10%!) then I can also more easily bear the situation of not making equity headway right away. At 40% or more I have far greater obligations and far less flexibility. Feh.
 
ladelfina said:
and your point is? Yankees and people from the old country tend to want to stay put and would never put themselves in hock for 40%. People in LA/Silicon Valley/Honolulu who knows?

If my debt/income ratio is under 30% (maybe it's 20% like W2R, or even 10%!) then I can also more easily bear the situation of not making equity headway right away. At 40% or more I have far greater obligations and far less flexibility. Feh.
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My point is that your point is irrelevant w/r/t how much of a payment goes to principle.
 
your point is irrelevant w/r/t how much of a payment goes to principle.
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Marquette, respectfully, I don't think it is irrelevant.
Let's say we have a family with an income of $100k and $40k of that goes to recent mortgage debt of almost entirely interest. A second family with a $100k income takes on a similar mortgage structure for a house that costs 1/2 as much. They can coast paying $20k of mostly interest OR they can accelerate payments.. they have more latitude to pay down principle if they choose. That's how I see it, anyway. The 40% family has that 40% noose around their neck that ain't goin' anywhere.
 
I can see this is going to head in the same direction as other parts of the thread so I'll abstain.
 
Why is everybody getting all high and mighty about principles? Is this an ethics thread?
 
50% of the credit losses in the second quarter of both Fannie Mae and Freddie Mac were Alt-A Mortgages. This occurred even though only 10% of their portfolios were Alt-A.

With 9.2% of mortgages in the U.S. being either more than 30 days delinquent or already in foreclosure, today's decision by the Fed to place these two major players in the secondary mortgage market in conservatorship did not come too soon. Were Alt-A loans the straw that finally broke the camel's back?

U.S. Seizes Mortgage Giants - WSJ.com
 
and the so called professionals said their computer models made by people with phd's predicted that people with good credit will never default at such high rates. absolutely shocking
 
This information has been freely available on the Internet for four years at least now.

Is it somehow more real now that the mainstream media is saying it is so?

Does the fact that TV and newspapers now state that Alt-A and even prime loans are in deep trouble somehow make it a fact, whereas it was tin-hat fantasy before?

Isn't it easier just to ignore information you don't want to deal with because it's too disturbing.

How about killing the messenger?

Isn't it better to denigrate someone who points out uncomfortable truths, then later say that nobody could have known?
 
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