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Next major wave of foreclosures is coming from Alt-A borrowers. Sub-prime is already running its course.
That's it. Subprime borrowers are defaulting now. The next wave will be from adjustable rate borrowers whose rates will start to reset in the coming years and who won't be able to flip or re-finance like they had hoped.
I forget the guy's name (some credible financial guy), but he was saying this on one of those news shows and it made perfect sense. He said you can look at all these adjustable rate loans and see exactly when they will reset. And analyzing this data, he thinks the next wave of foreclosures will be even worse than the current one and it's going to start soon and last for several years coinciding with the reset times on these loans.
Next major wave of foreclosures is coming from Alt-A borrowers. Sub-prime is already running its course.
If it's going to be a major wave ... I'm not seeing it yet. Maybe it will change over the next year but, I'm not seeing any major Alt A defaults in the higher end neighborhoods where I want to buy. There's a few but not anywhere near the amount you see in subprime neighborhoods.
With rates dropping the adjustable rate won't be much higher. If you are planning to live in the home then it may not be that bad of a time to buy. People have to get over the "flip this house" thinking - that won't work any more.
Which means that apartment renters will have to turn to roomates and the ability to charge more since there are more renters will further drive up prices. And for those who can't get an apartment or use mom's couch... there is renting rooms. Which will also go up, especially as more people need more money to keep from losing their homes.
Those who can't rent a room are simply out of luck
Of course, all that demand drives up the rental cost. At some point, all those people renting rooms & sharing apartments get tired of that, and try to find a house. At first, it will be easy enough, with rent prices having gone up, to find a place to buy at roughly the same, or not much more than, the monthly rent cost. Increasing demand for homes. Driving up prices.
It might be slow, it might take time, but the cycle is the cycle. At some point, it bottoms, and starts to climb. It's BETTER to get in just BEFORE the bottom, as you will have more choices and be in it sooner, but it's tough to predict that bottom, so it's EASIER to get in just AFTER the bottom.
With rates dropping the adjustable rate won't be much higher. If you are planning to live in the home then it may not be that bad of a time to buy. People have to get over the "flip this house" thinking - that won't work any more.
And so it begins....just saw this newly adjusted listing in my neighborhood, hopefully a sign of more to come:
9/25/2008 Sold $535,000
11/7/2008 Listed $579,000
1/6/2008 Reduced $539,000
This guy will not be making any money. With any luck, other flippers are taking notice.
Interesting point. I wonder if the Alt A resets are based on current interest rates. If so, maybe it won't be as bad as people have been predicting.
What I've been reading is that you can't refinance if your house is now worth less than you owe. So those folks are screwed out of taking advantage of current interest rates. I think some of those overall "stricter lending standards" will also be brought to bear.
That said, I strongly suspect that all the Fed shenanigans with the MBS have less to do with keeping rates low for new buyers and more to do with putting a net under all these borrowers whose rates are about to explode. Factor in that they're considering waiving re-appraisals (so they don't "know" your house is worth less than you owe) and it's pretty clear what the underlying motive is.
Wild Card? The current push in Congress to allow mortgage cram downs, which the Mortgage Bankers Association claims will drive up rates.
If mortgage rates were a roller coaster, I'd be throwing up at this point.
If it's going to be a major wave ... I'm not seeing it yet. Maybe it will change over the next year but, I'm not seeing any major Alt A defaults in the higher end neighborhoods where I want to buy. There's a few but not anywhere near the amount you see in subprime neighborhoods.
Hope I'm not being massively redundant here, but I'll take a chance since I've only posted this on Real Estate Forum. This interactive map by the New York Fed will let you (roughly) track Alt A conditions in your zip code. Pay special attention to the "6 month change" tab, which lets you see where the trend is:
If it's going to be a major wave ... I'm not seeing it yet. Maybe it will change over the next year but, I'm not seeing any major Alt A defaults in the higher end neighborhoods where I want to buy.
You shouldn't be seeing much of it yet, the loans are just starting to recast in large numbers this year. The original reset figures can be seen here:
But the option pay ARMs (the worst of them) will recast sooner then original estimated as most are negative amortizing. Option pay ARMs recast when loan to value reaches 110% (115%) regardless of how much time has past.
Also, regarding current interest rates. Although the lower interest rates will help people that took out standard ARMS that were within their means, its not going to do much for the pay option ARMs. 70% of the people with these loans are paying the minimum payment so even with low interest rates the payments are going to recast significantly above their current payment (30~60% depending on the initial teaser rate). IO arms will also recast higher too as they essentially turn into a normal amortizing ARM once the IO period is over, but you need to make up for lost principle payments so the payments are higher than if you got a standard ARM initially.
Anyhow, the Alt-A/option pay ARM crap in 2009/2010 is going to look a lot like the subprime did in 2007/2008. The only good thing is that all the related mortgage back securities are already highly discounted so it shouldn't stock the financial system that much as everyone is already planning on it occurring.
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