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The Alt-A Reset Wave, What it Means



August 13, 2008 – Comments (7)

Who will be the Bagholders in the coming wave of Alt-A resets and defaults?

Well, those "richer" folks who lied about their income to get into big homes already holding empty bags as prices plunge. Their neighbors, who hoped that the bubble prices were real get to hold an edge too. But according to this good post at Calculated Risk, a lot more banks will be holding this bag than with subprime, since Alt-A was more likely to stay on the balance sheet than be shipped off to outside bagholders in the CDO markets.

Still think financials are cheap? You have no idea what's on those balance sheets, folks, and the only surprises in there are bad ones.

7 Comments – Post Your Own

#1) On August 13, 2008 at 7:53 AM, rd80 (94.78) wrote:

One positive from the Fed slashing rates is that resets aren't as big a problem as many anticipated early in the crunch.

In their last quarterly report, WFC stated that most of their loans that will reset over the remainder of the year will reset to the same or a lower rate.  I don't know if Wells' rate adjustments are typical of the market, but don't see why they wouldn't be.

I agree there's more bad news out there, but the adjustable piece of the market may not be as bad as feared. 

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#2) On August 13, 2008 at 8:15 AM, TMFBent (99.17) wrote:

The Fed can only do so much. Rates are set by other benchmarks, and they only follow the Fed so far. I've posted graphs on this before. Maybe time to update.

Also consider that many of these people aren't just seeing an adjustment, they're going from a "pick a payment" to having to make payment of principal and interest. They couldn't afford many of these gimmicks in the first place, and having to actually pay full interest plus principal will cause them some big headaches.

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#3) On August 13, 2008 at 9:19 AM, TMFBent (99.17) wrote:

Here's an updated version of where rates are heading, against new homes data. Doesn't show reset rates, but there are a lot of indexes for those. Does make the point that rates don't follow Fed Funds in lockstep, of course, because folks lending money have to worry about lots of other stuff, like whether or not the greenbacks they get back will be worthless.

single fam starts vs mortgage rates - june 08

Full Size HERE

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#4) On August 13, 2008 at 10:00 AM, capsoregime (55.27) wrote:


 The only good thing in all of this, IMO, is a bit of schadenfreud insofar as the people who made fun of me for not going all out during the housing boom are now in tough times, while we live comfortably paying our reasonable fixed rate mortgage on a reasonably priced house.  

 I don't like to see people lose their homes no matter the situation, but I watched too many people play right along with the banks, pretending they could afford 400k homes on 40k a year, to feel as much sympathy as I'm "supposed to" according to the media.


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#5) On August 13, 2008 at 10:57 AM, TMFBent (99.17) wrote:

Here's how I look at it. (The you here is not you, if you catch my drift...)

If you paid below-market rent to the bank for a few years on a loan you can't afford, and have no equity, they you didn't lose a home. It was never yours (theirs... whoevers...)

That's it's pretty impossible for me to feel sympathy for anyone who's having to move out of a place they can't afford. Life happens. Rent.

You made the right move, so don't feel bad about not feeling bad. What the knee-jerk, bleeding-heart simpletons in the media forget to mention is that this entire Ponzi scheme rewarded the irresponsible and the fraudsters, while the vast majority of responsible folks like us were actually victimized by ridiculous prices. Now that things are swinging back toward normal, we're supposed to feel sorry for the folks who perpetrated the scheme?

Don't let me loose in a newsroom any time soon!


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#6) On August 13, 2008 at 11:07 AM, rd80 (94.78) wrote:

Thanks for the chart.  Very surprising to see how much disconnect there is between 1-yr ARM rates and Fed funds/LIBOR.


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#7) On September 09, 2008 at 9:19 AM, bendlund (98.47) wrote:

Another reason long term mortgages will generally not respond as much to the fed funds rate as long term bonds is pre-payment risk. Of course, that doesn't explain why rates have gone up as fed funds has fallen.

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