In the mortgage industry, there are mortgage loans approved without requiring proof of the borrower's income or assets. These are termed as "liar loans"or Alternative-A loans (ALT-A loans for short). Some of the worst types of these in involve proving no income, no job and no assets. This is known as the "ninja loan". The industry calls them bad but in fact if utilized the correct way by requiring a down payment and not offering them to investors. These loan types would still be in favor. It just so happened that wall street money offered them to people with ridiculously low credit scores and sometimes zero down payment. It's with noting that the no income verification loan, with proof of assets was around since the early 90's but it was given only to borrowers who had 25% down, not zero down.
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The housing market which has been hammered by the subprime foreclosures, may get hit by another wave of homeowner losses with these ALT-A loans go into default in unprecedented numbers. In certain parts of the nation, such as California, Florida, Nevada and Arizona, these loans could lengthen the mortgage crisis for another two years.
Many homeowners with ALT-A loans can't do anything. They are unable to refinance because their home value has decreased, and nowadays, banks and lenders are requiring full documentation for income and liquid assets.
The total losses of sub-prime and ALT-A loans is estimated to be nearly $500 billion according to Moodys. ALT-A may become responsible for 100 of the 500 billion.
Many of the lenders that specialized in ALT-A loans are gone such as American Home Mortgage, First National Bank of Arizona, Bear Stearns, Countrywide Financial, IndyMac Bank and more lenders are sure to follow.
Fannie Mae and Freddie Mac got into the industry for risky loans once they were cleared of accounting scandals. During this time, Bear Stearns and Lehman Brothers were supporting an increased portion of ever-riskier loans, and both government-sponsored companies felt the pressure to offer the same just to compete.
During the housing boom, ALT-A loans were very popular with investors who sought to buy properties then sell quickly within months. Moreover, the loans featured an interest-only payment that allowed investors or primary residence owners to pay only the interest on the loan for the first years whether it be one, three, five seven or ten years.
The most risky loan was the pick-a-payment or option ARM loan. Even I despised this loan for being offered. It is an adjustable-rate mortgage that allows the borrower the choice to defer interest payments and have it added to the principal loan balance. When this loan came out, you knew the end was near. Each month real estate was on the news for increased median average home price. Now it is the complete opposite and worsening. Although, the silver lining is some savvy investors do see opportunity where the numbers make sense on a cash flowing property. As the adage goes, buy when people do not even want to hear the word real estate.
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