Want to know why we are in the situation we are? Here are the applicable portions of Whitney Tilson and Glenn Tongue presentation. The beauty of it is that it lays it all bare…the news is not good..
First, borrowers were allowed to borrow more and more money against current income:
Then, because more money was available, inevitably, home prices rose at unprecedented levels.
As even more money was needed to buy homes, loan standards had to be reduce to accommodate.
Now, when the economy slowed so did housing prices. Then came the resets on mortgages, NINJA loans. A NINJA loan in a “no income, no job or assets”. As interest rates rose, the rests on these loans became unaffordable. What was supposed to happen? Because home prices had been rising, the borrowers were going to refi or, sell the home. But home prices fell. No the buyers have no option but to walk away.
How are foreclosures going? Nowhere but up. Until they decline, home prices cannot rise.
Will the foreclosure rate slow soon. Unfortunately, no.
The problem here is that the Alt-A loans were the “pick a pay” mortgages which lead to a negative amortization of the loan (when people pick the minimum payment, the outstanding balance actually increases). The Alt-A loans will reset at payments roughly 100% to 200% of the current amount. These buyers will not be either to refinance since they will underwater based on the homes new value and will not be able to sell because they now own more than it is worth. What will they do? Walk away.
What is an Alt-A loan and how are they performing so far?
A bank examiner says…
The news is good if you are thinking about buying a home in the next couple years. Price seem to have no reason to go up anytime soon and in all reality ought to sink further. Just make sure you have your 20% down. The old “Liar loans” are gone.
If you are planning on selling? Sorry..
Disclosure (“none” means no position):None
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