May 14, 2008
Subprime And Alt-A Statistics By County: The Feds Mortgage Map
Well, while a plugged-in tipster directed us to the site last week (cheers), another plugged-in reader steals a bit of our thunder and forces a pre-analysis publication by pointing it out this afternoon (yes, cheers as well). It’s the Federal Reserve's "Dynamic Maps of Nonprime Mortgage Conditions in the United States.”
Our thoughts will now have to follow (hopefully later this week), but a couple of hints as to what to see: December to January changes; San Francisco versus Contra Costa; and Subprime versus Alt-A. Remember, San Francisco is more an Alt-A than Subprime town.
∙ Dynamic Maps of Nonprime Mortgage Conditions in the United States [New York Fed]
First Published: May 14, 2008 4:47 PM
Comments from "Plugged In" Readers
is Alt-A any loan that is not a traditional 30 year fixed rate full documentation loan?
Posted by: anono at May 14, 2008 5:10 PM
Great question-- I've never seen that explained concisely.
Posted by: Moo at May 14, 2008 5:22 PM
Alt-A are a global term for non-GSE conforming loans (GSE: Fannie/Freddie)
I don't think they relate to the length/rate type.
Usually, they are "no docs", "high loan/value ratio", not too good Credit (but not dismal), high debt/income ratio. No docs is the most common case.
Subprime is a term for "no or bad" credit demographics.
Posted by: San FronziScheme at May 14, 2008 5:26 PM
"Alt-A are a global term for non-GSE conforming loans (GSE: Fannie/Freddie)"
By that definition, wouldn't jumbo loans be Alt-A?
Posted by: Dede at May 14, 2008 5:30 PM
Will be interesting to see if Alt-A is a significant risk in SF proper or not. According to that site, SF proper has ~25 Alt-A loans per 1000 units -- roughly half the state number and the other Bay Area counties.
So, while it's correct to say that SF is more about Alt-A than subprime, Alt-A should still have less of an effect in SF than in other areas.
Posted by: mk92 at May 14, 2008 5:47 PM
I visited this site a couple weeks ago when it was first made public. It didn't seem to provide any real clarity about much of anything, but maybe I'm missing something.
Posted by: "Dave" at May 14, 2008 5:55 PM
Here is a good rant by Tanta at CR (she is a former bank officer and mortgage lending specialist) on what is Alt-A.
The usual story on "Alt-A" by the mortgage industry is that it is prime credit—that's the "A" part of the name—but it is based on some "alternative" way of structuring or qualifying or documenting a loan, the alternative being in reference to GSE standards. The problem this has and continues to create is that there becomes a question of how far off the reservation of GSE standards you can wander before the "Alt" part cancels out the "A" part. This is a question at the loan level, and also at the pool/MBS level.
Posted by: EBGuy at May 14, 2008 5:58 PM
is Alt-A any loan that is not a traditional 30 year fixed rate full documentation loan?
No. In general, it doesn’t have to do with the loan terms (plenty of ARMs are prime) but rather a lack of income/asset verification (think “no doc” or stated income/assets) or a debt-to-income/loan-to-value ratio which is too high to qualify as a conforming loan.
...wouldn't jumbo loans be Alt-A?
No. Jumbos (which are too large to qualify as conforming loans) are in a different pool altogether.
Posted by: SocketSite at May 14, 2008 6:15 PM
So what about more exotic, but highly documented and lower LTV fractionalized TIC loans? Are those considered Alt-A? I'm betting there isn't even a name for them, since their is no secondary market for them at the moment.
Posted by: Ryan at May 14, 2008 7:51 PM
there's an excellent description of the mortgage/credit crisis this week on This American Life. It explains it in a way that makes it seem much worse than had to me, and not just limited to people who wouldn't have qualified for any loan. Sounds bad. Worth the listen.
Posted by: h o'connor at May 14, 2008 7:59 PM
"So what about more exotic, but highly documented and lower LTV fractionalized TIC loans? Are those considered Alt-A? I'm betting there isn't even a name for them, since their is no secondary market for them at the moment"
I saw an article a few months ago which said that nobody has ever defaulted on a fractional TIC loan. Maybe somebody has by now. Regardless, these are folks with capital to put down and willing to take a higher rate. I think they're safe.
As far as the initial point, being able to predict resets ... I don't see how that works. Do they simply project out which loans will be liable for reset if the borrowers only make minimum payments? What if the borrowers make one minimum one month, and then one interest only another, and then an amortized payment in the months they can afford it? Color me skeptical.
Posted by: fluj at May 14, 2008 7:59 PM
What's the black supposed to mean? I'm too tired to figure this stuff out. Who wants to spoon feed it to me?
Posted by: nowonderitcostsomuchhere at May 14, 2008 8:41 PM
How many Option ARMs were given as a percentage of SF homes purchased in the last 5 years? These prime loans (not Alt-A) will reset from Interest-Only to Principal + Interest.
Posted by: unearthly at May 14, 2008 9:18 PM
unearthly, that isn't the "reset" that is talked about for ARMs. The reset is when the loan goes from its fixed initial interest rate to a variable rate. That happens anywhere from 1 to 7 years in depending on the loan.
When that reset happens, the borrow is still going to be paying interest only. Most ARMs do not start requiring interest + principal payments until after 10 years.
The Neg-Amort loans I generally can start requiring principal payments when the borrow reaches some preset cap of how much interest they have added on to the principal. Once they reach that cap they have to start paying int + principal.
Posted by: Rillion at May 15, 2008 8:51 AM
In a conventional ARM you pay the amortized value of the loan at a certain variable rate in which the amount of principal slowly increases over the life of the loan; the amount of interest does the opposite. A conventional ARM may come with a fixed introductory which lasts 1-5 years.
An Option ARM also known as a Pay-Option ARM is a hybrid ARM and has been extremely popular since 2003. Like a regular ARM it has a low fixed rate for 1-5 years, and then resets to a variable rate for the remaining years of the loan (typically based on LIBOR). You still have to make amortized payments for the remaining years.
The difference is that during the intro period they allow you the option of either paying principal + interest or interest only or less than the accruing interest (creating neg-am). In return the bank, legally, can record a full payment.
When a reset happens on any ARM you are paying the amortized amount based on the balance and the time left to pay off the loan. You can't choose to pay interest only unless you have a Pay-Option ARM and that option goes away after the intro period (1-5 years).
Posted by: unearthly at May 15, 2008 10:39 AM
Yes, but for Pay Option ARMs that reset only after 115% of the original is reached, and there are many like that or similar, how can they possibly chart when they will reset? They can't. The borrowers can control when and if resets will occur with a relatively small amount of capital. It is not a flat time horizon to be easily charted.
Posted by: fluj at May 15, 2008 11:55 AM
With my ARM, I am not required to pay any principal until 10 years. My interest rate starts adjusting after 5 years.
With the ARMs my company offers (1, 3, 5, and 7 years before the interest rate resets) they are all the same, regardless of when the interest rates reset, they are interest only for 10 years, then become interest + principal for 20 years.
Unearthly, in your post you used the word reset differently from its standard meaning. You said: "These prime loans (not Alt-A) will reset from Interest-Only to Principal + Interest". Yet in the chart you link it clearly refers to Interest Rate Resets. That was what I was getting at. There can be a big difference between when these loans have their interest rates reset, and when they change from being interest only loans to requiring principal and interest payments.
Posted by: Rillion at May 15, 2008 12:21 PM
To clarify resets and recasts are two different things. IMO recasts are a much bigger problem than resets. Option ARM's and Hybrid Option-ARMs have low introductory rates, lower in the non-Hybrid case. A traditional Option ARM has short 1-12 month rate (say 1.5%) followed by a loan reset to 6-Month LIBOR + margin with reset % increases capped. These loans also recalculate/recast either after a certain time period (every 5-years) or if the balance has increased above the loan amount (by 10-25%). During recast the cap does not apply and the loan is re-amortized for the remaining years. The 10-25% percent threshold is for ending the negative amortization through minimum payments. They can also end minimum payments when your LTV >= 100%. See Federal Reserve on Pay-Option ARM's.
About 80% of Pay Option mortgage holders are paying the minimum (Nightmare Mortgages). If you see the Map of Misery chart I linked above close to 35% of recent South Bay mortgages/refi's were Pay-Option ARMs and this is probably true on the Peninsula and SF.
You can reach the recast threshold fairly quickly with low down payments, low intro rates, and a typical 10% threshold; within 3-6 years of the initial mortgage. For example it would take 67-Months to recast a loan with a 1.675% intro rate, 10% down, $900k balance, and a 10% threshold; payments would go from $3.2k/month to $5.3k/month.
Posted by: unearthly at May 15, 2008 12:55 PM
Sounds like your company is offering a hybrid loan (1-7/1 ARM combined with 10 years interest only). Do these loans allow payment below Interest (Pay-Option)? What's the margin for a loan like this? Also what percentage of customers are offered such a loan and what are the requirements?
BTW a conventional 1-7/1 ARM is not an Interest-Only mortgage; it has a fixed period and then an adjustable rate period amortizing over the life of the loan.
Posted by: unearthly at May 15, 2008 1:14 PM
This is the New York Fed's (the creator of the said mortgage map) defintion of Alt-A Mortgages.
Alt-A Mortgages: Loans marketed in alt-A securities are typically higher-balance loans made to borrowers who might have past credit problems—but not severe enough to drop them into subprime territory—or who, for some reason (such as a desire not to document income) chose not to obtain a prime mortgage. In addition, many loans with nontraditional amortization schedules such as interest only or option adjustable rate mortgages are sold into securities marked as alt-A.
Although the term “alt-A” applies technically only to securities, not mortgages, it has become common practice to refer to near-prime or non-traditional mortgages as “alt-A” loans.
Posted by: windsurfer at May 15, 2008 6:41 PM