With most of the country still reeling from the subprime mortgage meltdown, Mark Hanson is warning of the next looming blow.
Hanson, a bank consultant and former mortgage broker from the Bay Area who writes a blog under the name “Mr. Mortgage,” is among a handful of industry soothsayers who expect another big wave of foreclosures to hit sometime around 2010, driven by defaults among people holding less risky loans known as “alternative-A.”
Subprime is the term applied to loans given to people with shaky credit. Alt-A is the next-higher category, typically covering mortgages to borrowers who had better credit but didn’t want to document their incomes or wanted an initial period of low payments, often covering only the interest on the loan. Technically the term “alt-A” applies to securities backed by the loans, but it has come to be used for the mortgages themselves.
While defaults have been creeping up in the alt-A category this year, the foreclosures that have wracked the housing market so far have been largely the result of defaults among subprime borrowers.
“I think we are through the subprime blowup, but that’s nothing compared to what’s coming,” said Hanson, who made similar predictions on CNN in April.
His theory is that other borrowers will follow the path of subprime borrowers, who started defaulting when their mortgage interest rates reset to higher levels. Many alt-A borrowers face a bump in their monthly payments starting mid-2010, according to financial services company Credit Suisse. The firm’s figures, reported in the International Monetary Fund’s report on global financial stability, show a big bubble of U.S. mortgage rate readjustments hitting during that time period, including borrowers with “option ARM” loans that allow a borrower to initially make payments that are so low the balance increases.
A record $400 billion in alt-A loans was issued in 2006, according to data by specialty publisher Inside Mortgage Finance, cited in published reports. Alt-A accounted for 13.4 percent of all mortgages offered that year. Hanson said lenders first started pushing them in 2005 as a way for buyers to combat skyrocketing prices and continued issuing them into 2007 despite the subprime concerns.
“It’s not hard to get a 700 credit score,” he said, citing a typical score for an alt-A borrower when the loans were being widely offered. “If you had a Macy’s card and a gas card, you could buy an $800,000 home.”