Sunday, May 31, 2009

Alt-A Foreclosures in Sonoma

by Bill McBride on 5/31/2009 03:30:00 PM

The Press Democrat: Alt-A loans: Second wave of foreclosures ahead (ht Atrios) reports that there are 18,000 Alt-A mortgages in Sonoma County (about 18 percent of all mortgages). This is a larger percentage of mortgages in Somona County than for subprime - which accounted for about 10 percent of all mortgages in the county at the peak.

According to the story - using First American CoreLogic as a source - about two-thirds of these Alt-A loans will see a significant payment increase over the next few years, with recasts peaking in 2011.

First, I strongly recommend everyone read Tanta's Reflections on Alt-A

Alt-A is sort of a weird mirror-image of subprime lending. If subprime was traditionally about borrowers with good capacity and collateral but bad credit history, Alt-A was about borrowers with a good credit history but pretty iffy capacity and collateral. That is to say, while subprime makes some amount of sense, Alt-A never made any sense. It is a child of the bubble.
...
Alt-A ... overwhelmingly involved the kind of "affordability product" like ARMs and interest only and negative amortization and 40-year or 50-year terms that "ramps" payment streams. But it doesn't do this in order to help anyone "catch up" on arrearages; people with good credit don't have any arrearages. Alt-A was and has always been about maximizing consumption, whether of housing or of all the other consumer goods you can spend "MEW" on. If subprime was supposed to be about taking a bad-credit borrower and working him back into a good-credit borrower, Alt-A was about taking a good-credit borrower and loading him up with enough debt to make him eventually subprime.
There is much more ...

Second, most of those Alt-A loans were in mid-to-high priced areas. So the foreclosure crisis will now be moving up the value chain. But unlike the low priced areas where there are more potential first time buyers and cash flow investors waiting for prices to fall, demand in mid-priced areas usually comes from move up and move across buyers. Since a majority of the sellers in low priced areas are lenders (DataQuick reported 57.1 percent of sales in Sonoma in March were foreclosure resales), there will be few buyers for these Alt-A foreclosures.