A couple of you asked me this morning for some more information on the Alt-A loans I wrote about in this story last night.
One reader looked at this graph (thanks to my talented colleague Sarah Johnson for building it) and wondered if the “option-ARM resets” he hears about are within the 14 percent share of active loans that are Alt-A:
About half of the Alt-A category is option-ARMs, a couple of industry trackers told me. The other half is stated-income or low down-payment or other high-risk loans for good-credit borrowers. Basically this is the category for the innovations of the boom for good-credit people.
Option-ARMs are those payment-option adjustable-rate mortgages that allow borrowers to pick a payment. The lowest possible payment each month on many is negatively amortizing, which means the borrower pays less than even the interest that is owed each month, and the rest is tacked on to the principal.
Sometimes those loans have fixed payments for a certain period (say, five years), but are still interest-only for another period. In that later period, the borrowers see an adjustment in interest rate every six months or year, dependent on certain federal or international interest rate indexes. Because interest rates are so low right now, some option-ARM holders are actually seeing their payments go down when they hit that first reset. (Stay tuned to Survival for a reader’s account of his mortgage.)
But the real payment shock comes when the borrower has to start paying back the principal. The balance of the loan is then amortized over the rest of the life of the loan.
I included some projections for payment shocks in the story:
Nearly 45,000 adjustable-rate loans of all types have already hit the payment-shock point in San Diego County in recent years, according to LoanPerformance. In the next year, another 24,638 will hit that point, followed by another 95,209 the year after that.
In more than 25,000 Alt-A cases, the loans haven’t hit that recast point, but already homeowners are facing the fact that their mortgages are worth more than their houses could sell for. By the end of last year, 31 percent of homeowners with a mortgage in San Diego County were upside-down.
I’ll be sharing some of these numbers on NBC 7/39, our media partners, today at 4:10 p.m.
And for more on Alt-A pain, check out Rich Toscano’s perceptive post from about a year ago.