No Hope for Option ARMs or Alt-A Loans – Loan to Value Ratios of 169% Simply do not Qualify for Help and Cement the Destiny for Billions in California Loans. Two Case Examples in Irvine and Garden Grove.
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One of the big problems that really isn’t addressed when discussing option ARMs or Alt-A loans is the fact that many are tied to the hip with second liens. If it wasn’t bad enough to have one toxic mortgage imagine having two. It is also a bad twist of fate that most of these loans (upwards of 60% of option ARMs) are in the state of California. With home prices still scraping the bottom of the barrel, some option ARMs are pulling in combined loan-to-value ratios of get this, 169 percent. Is it any wonder why California is destined to have problems with their housing market for years to come?
Another issue with second liens is the fact that many lenders have no incentive to give up their position. Under HAMP, a current HAFA initiative is pushing for second liens to be relinquished for a small sum (i.e., $1,000) but the likelihood of success is small. Why? First, this will make the second mortgage holder realize a massive loss for a small sum. Say the loan was made by WaMu for $50,000. They either get $1,000 and realize the loss or pretend the asset is still worth $50,000. Many banks will opt to pretend with the latter option.
This chart was examined on Rortybomb:
The chart is full of juicy data. But take a look at the Alt-A and option ARM categories. Even with the first mortgage only, under the “Curr LP LTV” category we already have astronomical negative equity. But throw in that second lien and combine the loans and we start getting negative equity that is off the charts. Many of the second note holders are completely underwater.
This is where another problem becomes present. What if the second mortgage originated from the same lender as the first? This is the case on many loans:
The above data is for a home in pre-foreclosure in Irvine California. Countrywide has a second for $330,000 and a third mortgage for $280,000. So do you think $1,000 is an incentive to take a $610,000 write down? The home would probably sell for $700,000 today or barely enough to cover the first mortgage. This is where the real problems will hit and bigger write downs are destined to happen.
Or here is a more clear cut case:
This is a pre-foreclosure in Garden Grove. MortgageIT is imploded lender number 306. The home above is probably valued at $280,000. So the 2nd is worth zero and the 1st is worth half of the current balance. A $1,000 may not be incentive enough for whoever holds this note to move on the place if it requires a major writedown.
The short sale program looks to move forward in April so we’ll have to wait and see how many lenders are ready to jump on this. There is little reason to believe that option ARMs or Alt-A will have a pretty outcome.
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