The New York Times says possibly, thanks to Alt-A loans that had generous teaser rates. Those borrowers will take longer to get themselves in trouble, but without rising home prices, eventually they, too, will find themselves under water.
I'm a little more skeptical than the Times. Option arms and other exploding loans became popular in 2005 and 2006, thanks to rising home prices. But Alt-A buyers qualified for longer teaser periods than subprime borrowers--5 to 7 years instead of 2 to 3. That means that those defaults won't start coming until 2010 at the earliest. By that time, economic growth should be picking up, and (at the rate Ben Bernanke is going, anyway) inflation will have eased some of the pain of their loans, even in a weak housing market. Analysts generally expect housing declines to be three years from peak to trough, so we're riding out the worst of it right now--at least, if history is any guide.
Moreover, Alt-A buyers have more to lose, in terms of their credit rating, and are generally a little more firmly rooted in the American homeownership culture than those borrowing at subprime rates. I'd expect them to fight a lot harder to hold onto their homes, and their ratings, than the subprime borrowers--85% of whom, remember, are still paying their loans on time.
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I don't think we're riding out the worst yet. According to http://www.housingtracker.net/ we're still at a high for inventories. Prices will have to fall even further to get back to pre-boom levels.
I'm convinced California is underrated as a source of trouble long-term. If you are 20% underwater here, as most who bought at the peak are now, you are not going to be selling your house. You would have to bring $100K+ to the closing! People just aren't going to do that to protect their credit rating.
Since people move all the time for reasons beyond their control, like job loss, divorce, illness, etc., there will be continuous walkaways until prices recover (not for years.) I don't see that people have a choice, unless they want to destroy their savings to protect their credit rating.
That means a steady din of foreclosures, keeping prices down, hurting banks, and feeding back into the whole mess.
I concur with Michael. I'm already seeing this here in Florida; people walking away from their homes because they have to move. These are people with fixed mortgages well within their ability to pay. They just have to move for their jobs or whatnot.
inflation will have eased some of the pain of their loans, even in a weak housing market.
That's only if we get the corresponding wage inflation, if not then it will make the housing market worse by driving up mortgage interest rates and reducing the amount of money that can be spent on housing.
I'm convinced California is underrated as a source of trouble long-term.
In San Diego we'll probably need at least a decade before we see 2005 prices in nominal terms again without heavy wage inflation. 80% of the option arm/neg am loans are only making mininum payments, and are likely unable to make much higher payments when it resets and they have to pay full interest + principal on a higher loan value than when they started.
Analysts generally expect housing declines to be three years from peak to trough, so we're riding out the worst of it right now--at least, if history is any guide.
It was about 7-8 years during the housing crash of the 1990's. Those who bought at the peak had to wait about a decade to see the same prices.
For perspective, if 15% of a bank's loans were non-performing assets . . . I don't know because it would have been taken over by the FDIC long before that and the Deposit Insurance Fund would be needed to pay off depositors.
Now, loans are only something like 60% to 75% of a typical bank's assets, and subprime is only a fraction of all mortgages, and banks have loans besides residential mortgages, etc. But non-performing assets at 3% would have a bank wearing naked shorts. When are you start going to start worrying about subprime defaults? Not until they hit 50%?
The problem with Alt-A is that it is muuuuuch more skewed towards California/Florida, muuuuch more skewed towards investment properties, and muuuuch more skewed towards condos/PUDs (newly built subdivisions) than were subprimes. So as '03/'04 Alt-As start to reset this year and (especially next), they are only going to be adding to the foreclosure backlog in Cali/Fla, which is going to further exacerbate the situation there.
The problem with Alt-A is that it is muuuuuch more skewed towards California/Florida, muuuuch more skewed towards investment properties, and muuuuch more skewed towards condos/PUDs (newly built subdivisions) than were subprimes.
You can take the half-full approach and say that serious Alt-A meltdowns won't be so bad as they will have a mainly regional effect.
Perhaps this is what housing crashes do - bite harder or softer, earlier or later, in different sections of the market. It has been like that in every country where I have seen a crash.
In sectors where a crash bites late, the banks (and savings and loans) most exposed have time to wake up and take avoiding action; which tends to reduce the problems. But never underestimate the blindness of bankers - some of them will find ways of letting AltAs drive them to the wall.
few points, many of the alt-a's were also 100% financed, these sorts of loans are hard to find now a days. When the home owner tries to sell the buyer in SF will have pony up 20%. tough for a 700K house, not so tough for a 500K house given SF's median income. Also as the alt-a's have no money in the house that the have lost and only paid interest, leaving the house other then the credit hit may not be as painful as many have assumed.
next point is that many alt-a's resets are linked to the current value of the house. resets hare happening earlier than many home owners had hoped as the value has decreased.
take home its gonna get ugly in SF
You can take the half-full approach and say that serious Alt-A meltdowns won't be so bad as they will have a mainly regional effect.
Areas that did not see bubble appreciation aren't being affected as much. Take a look at the income/house price ratio in your area, if it's somewhere around 3 then that area is affordable to regular people with 30 year fixed loans. Depending on the area, the normal ratio may be higher than that. In San Diego it is historically 5, for whatever reasons. This leads to a historic median price of $300K ($60K is median household income), but even with the 25% loss for the area we're still at $400K. This tells me we still have a ways to go. Your area may vary, but even 3-4 years of zero growth eats away at your home price in real terms.
How this relates to the country as a whole, is that the losses on the coast are perfectly capable to force major bank closures even if the rest of the country performs just fine. It has also tightened up lending nationwide, so it may be harder for people to buy houses in other parts of the country as well. The bailouts have nothing to do with keeping people in their houses, and everything to do with keeping wealthy and connected bankers happy.
FYI
1) most Alt-A loans will reset DOWN: LIBOR and Treasury rates are down, Alt-A will reset lower - not something the hysterics talk about much
2) "Teaser" rates are a myth - the yield curve back in 2004-2005 was incredibly steep - short-tern rates were very low compared to long rates (which is what the long-term investor in the mortgage cares about), so the introductory fixed rates were low - at market rates - but not "teased" . Again the myth of teaser rates is something that the left/hysterics have propagated to claim all mortgage lending was "predatory"
3) Some pay-option Alt-A loans will have payments that go up IF the slob borrower has been making MINIMAL interest only payments for the past, say 3-5 years. I say - f**k them. It is as if someone racked up $50k of credit card debt and made the min monthly payment for years, screw 'em, what do they expect? they should be foreclosed on
Count on the NY Times to write a groundbreaking article about... well about bullshit
Is 5 years of a fixed payment really a teaser rate? That seems like the wrong language to me.
Also, most of the defaults we're seeing are not because mortgage rates are reseting. Rather, subprime borrowers are defaulting before the rates even reset, because they can't even pay the teaser rate or they gave up paying once the house became worth less than the mortgage.
3) Some pay-option Alt-A loans will have payments that go up IF the slob borrower has been making MINIMAL interest only payments for the past, say 3-5 years.
About 70% of the people in pay-option Alt-A loans have been paying the minimum. There is going to be a lot of pain in this area, when there are resets. A lot of these loans are in the mid-high end areas of the coasts, and a lot of the people who took them are flippers.
1) most Alt-A loans will reset DOWN: LIBOR and Treasury rates are down, Alt-A will reset lower - not something the hysterics talk about much
I agree, but how many people can truly afford the house without being able to use a HELOC or refi to cover the bills? How many are investors who may just walk away, since they can't make money on the house anymore?
"Teaser" rates are a myth
I agree that they were given market rates, but the people who bought the houses could barely afford the loan during a time of some of the lowest interest rates in US history. The banks and borrowers knew that the borrower wouldn't be able to pay the loan back, unless there was major housing appreciation.
I don't feel sorry for any of the people who got caught up in this, except in the cases of outright fraud. Most knew what they were doing, gambled on housing appreciation and lost.
We are already seeing houses from 2006 selling at $310,000.00 now going for minimum $110,000.00 or even less. In Minnesota and never lived in!! They are still trying to sweep it under the rug in Minnesota the big housing problems. My husband and I spoke with a couple that closed on a house in May '08 at 199,000.00 and according to the county records they paid $223,000.00 but anyhow that same house within a block of theres is on the market for $135,000.00 "asking price" and it was originally $309,000.00. "Asking Price" with indy mac means they will go 10% less from the asking price or like some good friends of ours offered 50,000.00 less this past week and the bank took it after they had reduced the property 105,000.00... yes those numbers are right! RealEstate agents say that this rarely happens, we do not trust realestate agents even though they say they have our best interest at heart, they are only interested in making money and will do anything to get the sale! We have looked at homes in general this past week with a realestate agent and all the homes that we seen are not listed short-sale or forclosure but NOBODY IS LIVING THERE AND IT HAS BEEN ALMOST 2 YEARS IN MOST OF THESE HOMES?.....HMMMMM??!!! The words out that there is going to be another 15-20% decrease in home values for next year and yes Minnesota this will also effect YOU!