Apparently, Subprime is only the 1st wave of loan defaults to hit the US. There is a 2nd wave, consisting of Alt-A and Option ARM loans. Check out this video snippet from 60 minutes.
Current “Subprime” defaults
Subprime = loans to least credit-worthy people
Projected “Alt-A, Option ARM” defaults
Alt-A = Alt-A loans are primarily credit-score driven, as its borrowers don’t have proof of income from traditional employment.
Option ARM = Option adjustable rate mortgage ~ low initial annual interest which resets after 3-5 years
Combined Chart by Credit Suisse
If the above is true, it’s good news for property buyers down the road, bad news for people who bought other properties for investments.
Generally though, it’s bad news for the world (especially Singapore), as the US mess will affect the rest of the world. This might mean a higher rate of retrenchments, unemployment, but hopefully not too serious a domino effect.
Hopefully the Obama Administration is aware of this, and have plans to prevent the 2nd wave from happening.
– “The Next Housing Catastrophe Waiting to Strike” by Kristin Graham (link)
– “Alt-A Loans Spiraling Downward” (link)
– “Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected” by Paul Jackson (link)
3 thoughts on “Alt-A and Option ARM – the 2nd wave after Subprime?”
I would like to bring a very important survey to your attention. This survey has an important impact on the upcoming Foreclosures and Job Loss that will result when millions of self-employed businesses default and fail.
CBS 60 Minutes had a segment on this crisis. Happily, it has finally hit the mainstream media… “The Mortgage Meltdown” aired on Sunday 12/14/08.
I am a Professor at Kean University School of Business. I ahve testified before the US Senate on this issue, and I would like to bring it to your attention.
Scott Pelley’s piece on the 2nd Wave of Foreclosures overlooked a critical fact. The next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the “Troubled” assets in TARP were marketed to the self-employed who fell prey to them.
An NASE survey,www.nase.org, was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein( That’s me) and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.
These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.
The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners.
I would like your help in bringing this to the attention of Washington or whomever you believe can help bring this to light.
See the website under NASE News for the Press Release and my Commentary. http://www.nase.org
Prof. Samuel D. Bornstein