Tell Me Lies, Tell Me Sweet Little Lies
I’m working on this story today about the ripple effects of the subprime crisis on the wider mortgage markets, specifically something called an Alt-A loan. What’s an Alt-A? Well, I did a little net-search and found a wide variety of definitions:
- A-minus credit
- The traditional definition of At-A has been loans that have less than full documentation.
- Also referred to as low doc/no doc
- Liar loans
- A loan-to-value ratio in excess of 80% but lacking primary mortgage insurance
- A borrower who is a temporary resident alien
- A loan secured by a non-owner occupied property
- A loan secured by a non-warrantable condominium unit or hotel
- No verification of the borrower's income or assets in connection with originating the loan
- No requirement that the borrower's expenses be less than a specified percentage of his income
- The term used to describe those borrowers that, for a variety of reasons, are not Prime borrowers but are a better risk than subprime.
Ok, so from what I can glean, this type of borrower can basically walk into a mortgage broker, get a clean bill of credit rating, and simply tell the loan officer that he or she makes a good living, has lots of assets and can certainly handle the mortgage.
Here comes the scary part: According to Standard and Poors, the Alt-A market was worth less than 20 billion dollars in the fourth quarter of 2003, but has now swelled to more than 100 billion dollars in each of the last three quarters of 2006. New Alt-A loans in 2006 totaled about 386 billion dollars, an increase of 28% from the year before.
“The Alt-A is sort of the hidden bomb in everyone’s portfolio,” says Janet Tavakoli, President of Tavakoli Structured Finance. “As we’re seeing the housing bubble contract a little bit, we’re going to see the coupons reset on some of these Alt-A loans, and that’s a little bit like the levees breaking, because these homeowners are going to have difficulty making these payments.”
But they have such good credit?? Right?? Well the trouble is that many of these credit-worthy souls are the same souls we like to call “speculators,” folks who wanted to buy and flip properties during the boom to make a quick buck. Many of them bought multiple properties with adjustable rate loans, and few of them ever occupied said properties. As housing values go down, time on the market increases, and many of these adjustable rate loans reset, well I don’t care how much good credit they have, they simply don’t have the cash to pay their mortgages.
Now I talked to a mortgage broker today who does these Alt-A loans. “I would say probably about 60% of my business is stated income loans, and a lot of my people are self-employed people,” says Mitch Ohlbaum, President of California-based Legend Mortgage. Ohlbaum notes that many of his competitors are going out of business, but he says he feels confident because he says he “knows” his clients.
“I’ve got a pretty good idea of what my people really make. I don’t just take their word for it. We have long discussions about what’s appropriate, and what’s a balanced amount of debt for them to be carrying. You know it’s more about what’s a comfort level for them, and going back to sort of standard underwriting – 45% of your gross income allowed for debt, for housing, assures Ohlbaum. Still, he admits, he doesn’t always get the paperwork, the W2s the statement of income, he also admits: “I’ve seen some of my clients want to stretch to buy the house, sure.”
My question is this: how many of us give over valuable assets to people who simply tell us that they are trustworthy. I mean, should I have said to my potential nanny candidates, “No need for a reference, if you say you’re good, then here, take my kids!” Or should I have said to the guy putting the addition on my house, “Nah, I don’t need to see any of the houses you’ve done, if you say you can hoist a beam, well have at it!” I mean come on!
No Doc Loan NOT a "Liar" Loan
To call a No Doc loan a “liar” loan is unfair and unjust. Since I’m self employed I’ve always had to finance my purchases through the Alt-A market. The lenders drool all over someone with my credit standing (808 Fico) and liquidity for the down payment (at least 20%). In turn I pay a slightly higher rate .25% -.75%. This added rate by far outweighs the about of paperwork that the underwriter would need, not to mention privacy issues. It is unfortunate that the “Press” remotely thinks that what is happening in the Sub-Prime market will spill over into the Alt-A market. If lenders followed the rules surrounding Alt-A and properly reflected them while being scrutinized - then no problem exists. Ethan E.
With the "Sub-Prime" drama, when is a story going to come out that does not blame the Lender. No one ever blames the repo man from taking a car from someone who cant afford it. the person knows they can't afford it, and they watch it go. Simple. This goes for any industry where Lending or Fronting money is the game.
One thing journalists may not know about the Mortgage and Banking industry is that we idolize Fictional Characters in movies and Books like Al Pacino as Tony Montana in Scarface. or Matt Damon in a favorite popular sales industry movie called Boiling Point. The Mortgage industry has a humor where a comparison to Popular Mafioso characters are looked upon and copied by "slanging loans". This is not Hollywood, although many of our industry headquarters are right here in Southern California. This is the wild west. Banks lend money, and depending on how "good for it" you are, to pay back, you get your interest rate. The loan broker, basically vouches for a person, saying they are good for it. Al pacino in Donny Brasco says "I vouch for you, your a made man, a friend of mine, or a friend of ours". You don pay back, we foreclose. The market turns to Rap video status with rims and Benz's in the drive way, everyone is spending money on Flat screen TV's, and MTV Cribs is the most popular show. If you want a house, ok, here are all the disclosures for the loan. You still want it? Ok. done. Now you have to realize, its not like poor people are buying million dollar houses. its not that simple to put ANYONE into any house. There are guidelines. As I'm sure you know. Ken M.
This article is so true. I know - I am an Alt-A sub prime underwriter (still employed). Speculators and people desperate to buy a home (unaware of the financial ruins they will get them selves into) drove up prices now their fall will help bring home prices down to a more reasonable level.
Also rates on sub prime loans with scores less than 620 have skyrocketed. I just closed a deal with an 11.375% adjustable rate first mortgage to buy a 2nd home and 80% loan to value. That rate use to be around 8% just a couple of months ago. Imagine what the rate would be if the borrower did an 80/20 combo. With a rate of 11.375% maybe they should just stay at a hotel when they are on vacation. Also we had a fraud class yesterday and I had files I was working on that fit many of the examples of red flags on files potential for fraud. I would say more than 95% of my files have misrepresentation on them such as altered verifications of assets for cash to close and inflated values so the seller can pay the closing cost.
Lets see what all this does to housing and the economy in the next 6 to 12 months. Philip R.
Questions? Comments? RealtyCheck@cnbc.com