The Next Mortgage Crisis? Alt-A Borrowers See Red

Alt-A mortgage holders join subprime mortgage holders in crisis.

ByBianna Golodryga, Alice Gomstyn and Charles Herman
February 18, 2009, 11:44 PM

Aug. 8, 2008 — -- The subprime mortgage mess has dealt a blow to families across the nation, but now a new mortgage disaster is percolating that's striking those with good credit and good jobs -- people who took out mortgages known as "Alternative A" loans.

"Either I walk away or I try and make this work," said Linda Minnifield, a northern California resident who is now struggling with her Alternative A loan.

Also known as "Alt A" loans, these mortgages are offered to people who fall in the middle of the spectrum of home-loan borrowers. On one end, there are subprime borrowers who have poor credit and qualify only for loans with high interest rates. On the other end, there are prime borrowers with good credit and steady income who qualify for loans with the lowest rates.

Like prime borrowers, Alt-A loans go to people with good credit. But in many cases they've received loans where they didn't have to document income or assets – in other words, to show the bank that they definitely have the income to afford their payments.

To compensate, banks can charge Alt-A borrowers higher interest rates than prime borrowers. But, thanks to their good credit, the borrowers still pay lower rates than their subprime counterparts.

These days, however, Alt-A borrowers are defaulting faster and faster. The number of Alt-A loans in which payments are 60 days late has quadrupled from a year ago to nearly 13 percent, according to the mortgage research company LoanPerformance, a unit of First American CoreLogic.

Many homeowners in trouble have option-ARMs -- adjustable-rate mortgages where the home borrower can choose usually one of four types of payments to make each month. That amount could range from the actual principle and interest due or it could be a minimum payment, often significantly less than even the interest owed.

The difference between what is actually due and what the borrower pays is added to the total amount until the loan climbs to a level when the bank will no longer allow the homeowner to choose how much to pay.

When that happens, the monthly payments could as much as double to pay off what is now a bigger loan. And as home prices have plummeted, many borrowers now owe more than their home is worth, a situation referred to as being "upside down" on the mortgage. Selling the home is often not an option because the homeowner can't pay off the loan.

"As home values in some places have plummeted, people are finding that it's very, very hard for them to make those increased payments or very hard for them to refinance because their home is worth less than what they paid for it," said Mellody Hobson, the president of Ariel Investments and a contributor to Good Morning America.

Minnifield, 48, said she is on the verge of losing her home. She's worried that she won't be able to afford her mortgage payment when it is scheduled to increase in October.

"I really want to keep my home, keep my family together," she said.

Hobson said that Alt-A borrowers worried about their loans should call their lender. "Pick up the phone now, before there is a problem, before you're even delinquent," she said.

"The good thing about Alt-A buyers," Hobson said, "is they actually have fairly good credit so they have a lot more options than the subprime borrowers."

Banks have "every incentive to keep individuals in their homes" because each home foreclosure can cost a bank $40,000, she said.

"They want people to work through these problems."

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