It's Not the Subprime, It's the Alt-A

From Musings of a Sentient Mind:

...Let's say you have a $750,000 house. You took a first mortgage as a "2/1 10%" ARM, which is a common ALT-A product. Its cheap because the interest rate is only locked for two years, then it floats at LIBOR (a commonly used interest rate benchmark) plus some percentage. You then took an "option interest" loan for the rest (down payment, what's that?) or even better, you borrowed the downstroke somewhere, then paid it back using a "silent second" - a Home Equity line (HELOC) that had an "option interest" feature.

Well, now the chickens are coming home. Your house has actually depreciated in value by 10% because, well, nobody's buying right now. So you have a $750,000 house with a $750,000 mortgage but the house is only worth $675,000! What's worse is that the interest rate is about to reset 2% up from your "teaser rate", and you know you can't make the payments three months from now.

So you shop for a $500,000 house (remember, its a down market!) You qual for that mortgage (your FICO score is still quite good, as you haven't blown a payment yet) on the basis of selling the OTHER house. You get the loan on THAT house, but its an ALT-A product too; you simply lie about your income, and since its a no-DOC loan and your FICO is in the 650 range, it goes right through.

You move in, then default on the original $750,000 loan!

This is happening all over California, and the bank is left holding the bag!

Note that NONE of this is happening in the Subprime space - its all in ALT-A!

And virtually ALL of the lenders are exposed to the ALT-A mess...

Found the link to the above at the Mortgage Lender Implode-O-Meter site I mentioned back in January. Two months later the implosions of lenders are, um, exploding. But everything is ok. Keep shopping.