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Mortgage Defaults, Part Two

Now that the initial wave of subprime mortgage problems is tapering off, alt-A and prime mortgage holders are taking their turn.

But with the U.S. economy struggling, homeowners with better credit are now falling behind on their payments in growing numbers. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets.

I can't believe people were giving out loans without proof of income and assets. When i applied for my mortgage, they asked for everything. I practically had to get their names added to my bank accounts with a debit card, they were so nosy.

Alot of the problems stem from those who opted for the ARMs (adjustable rate mortages). They were able to make lower monthly payments because they were only putting money towards paying off the interest, and sometimes the payments were less than the interest accrued. The balance would be added to the principal owed. Gee, who couldn't see that was a seriously bad idea? When their principal increased by 10-15% or when their grace period ended, they had to start making payments towards the principal. This "surprise" increase in their monthly payments led to the defaults.

The reason given for the delay on the alt-A and prime mortgages becoming delinquent is that their grace period was a couple of years longer than those with subprime mortgages. And you know what the best part is? This will have a bigger impact than the subprime mortgages because most institutions hold more alt-A and prime loans than they did subprime loans.

Why people with good credit and who theoretically could afford their loans didnt' lock in when the interest rates were low and instead opted for an ARM, i don't understand. What's wrong with you people?

By min | August 4, 2008, 10:46 AM | Liberal Outrage