Alt-A Mortgages: The next Time Bomb

Housing dominated the financial headlines once again today. There is more proof that the mortgage crisis has spread into all types of mortgages. I caught a piece today on CBS market watch which provided some troubling information on alt-A loan performance.

http://www.marketwatch.com/news/story/troubles-emerge-alt-loans-delinquencies-ratchet/story.aspx?guid=%7B4363524A-D5E8-4119-925C-E850DE6DB551%7D

Here is a quote from Alan Fournier that about says it all:

"Generally speaking, I do not believe Alt-A credit is any better
than subprime," said Alan Fournier, the managing member of Pennant Capital
Management LLC in Chatham, N.J. "The performance of this market doesn't surprise
me, given what's happening to home prices and credit availability today."

When you look at the performance of all loans you can see why Alan feels this way.

As late as last November the delinquency rates for
borrowers behind on their loans by 30 days on alt-A loans was ZERO. In February this rate had risen to 3.89%!!This is what happens when prices start to drop and people bought homes that they cannot afford. What we are starting to learn based this data is that people from all income brackets made the same mistakes. A lot of these alt-A loans were done with no documentation. Many speculators loved these loans because it allowed them to buy several homes that they could then "flip" for a big profit. Well when prices drop the mortgage payment doesn't and that that
flipper then turns into a flopper. Many of these Alt-A loans will end up in
foreclosure IMO.

There were $612 billion dollars of these loans in 2006 and
another 400 billion in 2007. These loans were then securitized into bonds. A year ago these bonds were trading at 100% of their value. Today they are trading on average at 10 cents on the dollar lower and some are trading as low as 30 cents lower on the dollar. That's a 10-30% loss of value on ONE TRILLION dollars of mortgage bonds at current prices. What will these bonds be worth as the delinquencies get higher and higher as prices fall and the speculators and the "in over their head" homeowners can't sell? Time will tell but its not gonna be pretty.

The bottom line to this is it will mean further bank write downs and further pressure on the housing markets. These numbers are starting to boggle the mind. The time bomb keeps ticking and the numbers keep getting worse. The explosion and unwind of this debt debacle is coming sooner rather then later. The speed at which it is unraveling is breathtaking. Now is NOT the time to buy.