A mortgage-lending tsunami might be swelling again. The next wave of defaults will come as a result of failed Alt-A mortgages, which were given to buyers without verifying their incomes, predicts Gilbert R. Yochum, professor of economics at Old Dominion University. He says the default rate for these loans is nearing that of subprimes. He expects that though fewer in number, failed option adjustable-rate mortgages will add to the mortgage mess. (These loans allow borrowers the option, over a specified timeframe, to pay a fixed principal and interest payment, pay interest only or, in some cases, pay a minimum payment for a predetermined period.)
“Based on current data, the option ARM and Alt-A default problem is, in my view, likely to drag out for at least as long as housing prices continue to decline and perhaps as long as through 2012,” Yochum says. Its impact might be dampened if the recent federal programs are effective in helping households to refinance out of these loans into more conventional fixed-rate loans and if mortgage rates stay below 5 percent, he says.