Mortgage Rate Resets for Alt-A Borrowers

Over 1 trillion in Alternate A loans are due to get their rates reset over the next 3 years. Alt-A Loans are a notch above subprime loans and this batch of loans are the ones that many people got in 2004-2006 and were adjustable rate mortgages.

Many people are already thinking that this reset of mortgages could cause as much damage as the submprime crisis we just went through in 2008 and early 2009. Fannie Mae owns upwards of 30% of those loans and has publicly acknowledged their is a large risk of default on this subset of borrowers.

When these loans originated, this Alt-A group of mortgages were considered to be relatively stable and not that high risk. Only over the last 6-9 months have people started to realize that the reset of these rates could spell further trouble for the already sagging financial markets.

One option that may help is for banks and lenders to start resetting these rates at levels that borrowers can afford. If the institutions wait until it’s too late we will end up seeing another huge freeze in the credit markets which will lead to a further decline in equities. Companies should wise up and realize that getting 5% on a loan is much better than getting nothing if the borrower goes into default and has to foreclose on the mortgage. The lost time of payment, while it takes about 6 months to complete the foreclosure process is a huge drag on earnings for the banks.

Let’s hope that lenders everywhere see this coming storm on the horizon and act prudently to reset rates to levels that borrowers can afford so we can start to rebuild the faith in our financial markets.