Is there another shoe to drop from over-mortgaged home owners?

Vikas Bajaj from the NYT thinks so. Arrear rates on alternative-A mortgages quadrupled to 12 percent in April form a year earlier and deliquencies from prime loans also doubled to 2.7 percent. The problem is not so much raising interest rates on adjustable rate mortgages but having to pay interest and principal on a special from of mortgages. Some borrowers in option adjustable-rate mortgages, which were a popular alternative for home owners during the boom years, could see their payments jump by 50 percent or more. In focus are again areas like California where the housing boom was most obvious during the boom years. This time it could be particularily hard on regional banks.

from the NYT:
Delinquencies in prime and alt-A loans are particularly challenging for banks because they hold more such loans on their books than they do subprime mortgages. Downey Financial, which owns a savings bank that operates in California and Arizona, recently reported that 11.2 percent of its loans were delinquent at the end of June, a big increase from the 6.1 percent that were past due at the end of last year.

The bank’s troubles stem from its $6.2 billion portfolio of so-called option adjustable-rate mortgages, which allow borrowers to pay less than the interest owed on their mortgage in the early years. The unpaid interest is added to the principal due on the loan, so over time borrowers can owe more than the initial loan amount. Eventually, when loans grow by 10 percent or 15 percent, the borrowers are required to start paying both the interest and principal due.
click to enlarge










source: Housing Lenders Fear Bigger Wave of Loan Defaults
By VIKAS BAJAJ, NYT http://www.nytimes.com/2008/08/04/business/04lend.html?em=&pagewanted=print