ALT A is Broken? Really?

So once again wild swings in the markets have unleashed the bullish cries
of' Bottom!' by the guestimating industry cheerleaders like Jim Cramer,
the NAR, and similarly minded government ilk who believe we can all
collectively wish our way out of this mess.  But the proverbial writing has
long been on the wall, and we have yet to measure the depth of the losses.  

What are the monsters are lurking in the nearby shadows?  Well I am not
going to tell you anything you have not already figured out if you have been
following news posts and blogs about the mortgage industry with even a passing
interest.  It's that illegitimate offspring of Sub prime and Prime called
ALT A that is taking over the national spotlight.  Now everyone in charge can
throw up their hands in surprise that the golden child of the short lived
post-sub prime era was a bad idea too.  This from Housingwire.com's Paul
Jackson on Fannie' mounting ALT A problems:

http://www.housingwire.com/2008/08/08/fannie-maes-alt-a-pain-may-extend-to-bofa/

Any changes purchase/underwriting criteria still clearly came far too late to
prevent GSE (Fannie) from taking a direct credit hit, now that the Alt-A
mortgage class is the latest area of mortgages to go through a meltdown, and
many borrowers are defaulting at a seemingly parabolic rate each month and each
quarter.' This should not be not be news to anyone, especially those who
should be in the know.  As late as the spring of 2007, major national lenders
were still aggressively marketing ALT A products with with ridiculously vacuous
underwriting criteria:  A borrower could secure a no income/no asset
documentation cash-out refinance loan, with a simultaneous second mortgage up
to 95% CLTV, on a non-owner occupied investment property, with only a 620 FICO,
two months PITI reserves and a debt to income ratio up to 60%. Whah?

So even as executives were in the midst of struggling to explain how they
were blindsided by the rapid demise of their sub prime divisions, they were
also racing to expand ALT A criteria to cover all but those borrowers with the
very worst credit ratings.  And they did not stop there, they pressed on with
the development of other exotics Iike Near Prime and Expanded Approval,'And
it was all done to maintain market share and the record origination levels they
had grown addicted to.  But who will they blame in the media for their greed
driven and fiscally irresponsible business practices?  Why, all the lying
cheating borrowers who did this to them, of course!  Also from Jackson's
article:' The strategy isn't all that surprising, as nearly anyone in
the mortgage business these days is looking for a reason to push the bad loans
' and the losses associated with them'  off of their books, and onto
someone else's. And in the case of Alt-A, there's likely to be more
than a just a fair amount of income misrepresentation, among other sorts of
fraud.'

I am in love with this line of reasoning:  The average American homebuyer-
be they plumber or grocery clerk or postal worker'  collectively conspired
by the millions to defraud the financial industry out of 3 trillion dollars in
about a five year period.  And now, they are cleverly concealing their new
found fortunes by going through the motions of being foreclosed upon and thrown
out on the street just to cover their tracks.  Truthfully, how much can you be
lying about if you only need to get yourself to a 60% DTI?

I know if they look at enough liar loans, they will find some liars. But
that is missing the fundamental issue at hand here, that it was lax
underwriting and low down payments initiated by the lenders, not the borrowers,
that are responsible for this mess,  

I can remember as a little boy, asking my dad why someone would bother
putting up a chain link fence that was only four feet tall.'  Little fences
are only for keeping good people out of trouble,' he told me.  And that is
exactly what the lenders did not do when they developed and marketed these and
other more complicated products like Pay Option Arms, they built them without
the little fences that would have kept them and us out of trouble.  

Let's pretend for a moment that borrower overstatement of income on ALT
A loans really was so greatly overstated on average as to be responsible for
50% of all defaults on the books. Imagine what the effect a simple underwriting
requirement like a signed T4506'  the authorization to review tax returns
could have made.  They do not inherently prevent default on stated income
and asset loans, but they certainly would have made borrowers who might be
tempted to stretch the truth think twice about the consequences.  Instead,
there was a culture were no one felt they had to be really honest with anyone
else.  The hunters set the traps, and now they want to blame the animals for
getting snared, and the media just eats it up.  

So don't be fooled by those who need you to stick your money into those
raucous markets.  The time will come, but it's not here yet.  And it should
not be this difficult for the big brains to figure it all out.  The
underwriting is on the wall, the deals are closed, and the resets are coming
like clock work.  Let's all just accept that it is really no surprise to
any of us.