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The Alt-A Write-Downs Intensify...



February 14, 2008 – Comments (10) | RELATED TICKERS: UBS

There already have been some Alt-A write downs, but it seems to me that the focus of the financial losses so far has been the subprime.

UBS "reveals" "new" US loan exposure, $26.6 billion of exposure to the Alt-A.  They couldn't possibly have seen this coming and warned investors sooner... And they call these mortgages "less risky"

Here's a note about Alt-A from almost a year ago

"When buyers realized they couldn't afford the home they wanted, they took out alternative mortgages that helped them pay the higher price. Alt-A mortgages requiring few documents - often called stated-income loans -- allowed buyers to inflate their earnings and get a bigger loan, he explained. "In the past few years, Alt-A loans were made to weaker and weaker borrowers and the sector expanded downward along credit spectrum," he said. "In doing that, you draw up into the Alt-A space some of the problems that are affecting the subprime space.""

And here's a report, written in 2006, on how they increased in 2005:

"Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren’t risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why? Partly, it seems, because more people chose option ARMs. Those, of course, are specialty ARMs that give you the option to pay even less than the monthly interest you owe. The unpaid interest gets added onto your principal (negative amortization). Option ARMs climbed from 17% to 23% of first-mortgage originations.

Then there are alt-A loans—the ones you get when you don’t submit all the documentation that would be required to qualify for a straight loan. Those are usually chosen by people who have unsteady sources of income—or simply have too little documented income to qualify for a straight loan for the house they want to buy. The MBA says alt-A loans’ share rose from 8% to 11%."

And right now in Southern California some home prices are back to January of 2005, or earlier...  To put this into perspective, home prices went up an additional 22% ($80k) in the period that 1/4 of the mortgages written were already the alt-A mortgages, where you don't have to prove you can afford the mortgage.  I have no idea what percent would also have been the subprime market.  But, this suggests a great deal that bought at 3 and 4 year ago prices couldn't afford those prices.

This market has such a long ways to decline yet... 

Yup, completely new, and it is going to be completely new as this stuff resets and works it was onto balance sheets for the next two year... No one can possibly know to expect more write downs and write-offs in banks over the next two years... 



10 Comments – Post Your Own

#1) On February 14, 2008 at 8:23 AM, MakeItSeven (33.05) wrote:

I expect this formula to be 90% correct reglardless of credit scores:

Option ARM + bloated underlying asset which goes down 20+% later = foreclosure

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#2) On February 14, 2008 at 8:36 AM, floridabuilder2 (99.34) wrote:

alt-a was intended for small business people or self employed, just like everything in this mess it was taken to areas where it had no business going

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#3) On February 14, 2008 at 8:37 AM, dwot (97.03) wrote:

Off topic comment here on Buffett being too early?

"I have some bad news for Mr Buffett. This isn’t the bottom even for the better quality debt. As I have maintained for some time contagion in the derivative bond market is deeper than anyone realises and it has spread beyond investment and traditional banks. AIG know that only too well."

It is my fears around the derivates that has me out of the market... 

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#4) On February 14, 2008 at 8:37 AM, TMFBent (99.83) wrote:

You know they need to label it a "subprime" problem because that allows them to place blame on a few lenders, not most of them, and certainly not on the buyers who signed onto to loans they couldn't even afford without usurious rates after the hike. People who are paying 50% of their income at a teaser rate can't afford a home at a regular rate, let alone that 9-11% crud.

Unfortunately for the charlatans in industry and government who are trying to cover this up under the "subprime" sheet, there are those waves of Alt-As coming, and there's no way anyone can fix the problem.

People paid too much for junk with phantom money. The Phantom money's gone. The junk will drop in value. It has to.

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#5) On February 14, 2008 at 8:44 AM, dwot (97.03) wrote:

Now, here come the stories about housing prices declining.  I linked to two stories yesterday showing median housing prices back to Jan 2005 prices or even 2004 prices, and an $80k figure.

 This story features a woman who three years after buying is 20% under, so not breakeven as the articles implied.  The articles indicate 20% down from the peak, not 20% down from 3 years ago prices.  So, she's under by $80k even though she's owned for 3 years.

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#6) On February 14, 2008 at 8:49 AM, dwot (97.03) wrote:

Another morning Ekkk...

Blacklisting projects.... These building projects are basically blacklisted so banks won't lend for people who might want to buy...  The implications, these construction projects are toast...  Most are in Florida.  I'm just waiting to see what FB has to say on this one.

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#7) On February 14, 2008 at 9:04 AM, devoish (99.07) wrote:

Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren’t risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why?

Because the fight referenced below ended in the second half of 2004? (Just guessing, I do not know that it did, but the timing sure seems right.)

In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

It is fun to admire the free-market capitalist, but it seems to have been a bad idea to elect such people to lawmaking positions.

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#8) On February 14, 2008 at 11:16 AM, cabuilderboy (91.36) wrote:

There is plenty of blame to go around. But as an expert said on 60 minutes, if you give away money, people will take it!!

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#9) On February 14, 2008 at 11:28 AM, mickeyc21 (29.82) wrote:

So now you're a bear again floridabuilder?! I'm confused - you seem to swing wildly between opinions. Yesterday I'm "stupid" for suggesting we are just getting started and today Alt-A is a big problem?

You need to make up your mind.  

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#10) On February 14, 2008 at 2:30 PM, floridabuilder2 (99.34) wrote:

mickeyc21.... i've always been a bear, I just don't buy into the complete collapse of our financial system and laying concrete blocks at the entrance of my subdivision...... i'm bullish on public builders if they tank again.........  there is a difference between a bear in a bear market and hinting at armageddon, although that would be quite fun too

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