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27% of East Bay Homeowners Upside Down; “Alt-A” Resets Are Not So Bad

This morning the Contra Costa Times reported that 27% of East Bay Homeowners owe more than their homes are worth. Nationally, about 20% of homeowners owe more than their homes are worth.

On the good news front, the Sacramento Bee reports that the sub-prime crisis has almost run its course in the Sacramento area, as almost 80% of the sub-prime loans in the region have re-set. In California overall, approximately 67% of the sub-prime loans have reset. Analysts, however, continue to be concerned about the “Alt-A” loans that have yet to reset. “Alt-A” loans consist of, among other things, the “no-income-verification” Negative Amortization Loans and Interest Only ARMs that were so prevalent up until the summer of 2007.

But, as long as short term rates remain this low, the “Alt- A Resets” are not nearly as ominous as analysts predict. We have been in contact with at least three clients with “Alt-A” loans in the last week alone whose payments and interest rates are actually going down after their “dreaded” resets. This is again because these loans are tied to the currently very low short-term rates, and because the “margins” on these loans are far more reasonable than the “margins” associated with sub-prime loans. For example, a borrower might have a loan that adjusts to the “1 Year CMT + 2.75%”. “2.75%” is the “margin”, and the CMT (a Treasury Bill Index) is the borrower’s “index”. Currently, the 1 Year CMT is about 0.6%. So a borrower with such a loan would reset to 3.3%, and this is exactly what happened to an elderly client of ours in Berkeley and he could not be happier with his reset.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167