A Mortgages were designed for borrowers with high credit scores that could not document enough income to qualify for the mortgages required for the homes they desired. Also known as liar’s loans, Alt-A’s got around issues like insufficient income, too much consumer debt, and/or alimony/child support. The mortgages relied on stated income most of the time but mortgages were also done based on verifiable assets with no income statement at all. The loans were often structured so that the initial payments would be manageable but would increase beyond the reach of the borrowers at some time in the future. The logic behind the loans was that high credit scores were there for a reason. With higher real estate prices a given, it was assumed that the borrowers would be able to keep up with payments but, if not, they would refinance, or sell the home at a higher price. Due to the inflated real estate prices many of the Alt-A’s were done near the peak of the market, just as the bubble was about to deflate. As the market began to trend lower the necessary exit strategies began to disappear. Without refi’s or the sale of property as usable options, Alt-A mortgages started seeing defaults, foreclosures, and bankruptcy filings. Even when loan modifications were available homeowners walked away from properties because they were under water by hundreds of thousands of dollars.
Because these mortgages were larger than average, if the borrower ran into trouble such as an interruption in income due to a job loss or cutbacks in available work hours, making up the shortfall was much more difficult.
In many situations picking up moonlighting hours would not come close to covering what was necessary to make a monthly payment. After all, these were mortgages drawn on property at or near the peak of the market so monthly payments were high and going higher.
These mortgages are now defaulting at a rate of 24% of the total mortgages in the category. The rate is close to double that of the subprimes due to the fact that sub-primes still required verification of income and standard ratios still applied. Despite the low credit ratings of many of the applicants, subprime mortgages were designed and accepted based on the borrower’s ability to pay their mortgage payments both at initiation and after the payments had increased if the loans were adjustables. The reasons for the acceleration of defaults in the Alt-A mortgages goes right back to the logic behind the mortgages in the first place. A high percentage of Alt-A’s were never meant to fit into the budgets of the borrowers that sought them out in the first place.
These loans were designed to get people into homes whether they could afford them or not. The only way the loans could be considered a success was if they could be replaced on short order by refinancing or selling the home but once those options were removed, the homeowners were stuck with mortgages they could no longer afford, if they were ever affordable at all.
The one hope left for Alt-A borrowers trying to stay in their homes is to get loan modifications on their existing mortgages. Principle and interest reductions negotiated in a these modifications have put payments back in reach for many borrowers, allowing them to avoid to pain of a foreclosure or bankruptcy.
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The information contained herein is provided for general information and advertising purposes only and is not intended to convey a legal option nor legal advice for any particular case or situation. Nothing in this article shall create an attorney-client relationship. Nothing sent to this law office via e-mail shall constitute an attorney-client relationship. Nothing contained in this article shall be construed to be a guarantee or prediction of result. Prior results are provided for general information purposes only and do not guaranty, warranty or predict a similar outcome with respect to any future matter. Results achieved depend on individual circumstances and not everyone will qualify or be successful in restructuring their mortgage loan.
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