It won’t be long before Alt-A loans – which are ARMs or adjustable rate mortgage loans – will begin to come due, and one of the most vulnerable locations in the country will be San Francisco, and a couple of other surrounding areas.
One report says, “Of the 10 metro areas nationwide with the most option ARMs, three are in the Bay Area, according to Fitch Ratings, a New York research firm. They are the East Bay counties of Alameda and Contra Costa, the South Bay area of Santa Clara and San Benito counties, and the counties of San Francisco, Marin and San Mateo.”
This isn’t even the area most at risk from ARMs, as the general Los Angeles region in California is tops in the nation. But together, it’ll be staggering as to what the fallout will be in California, which is effectively bankrupt already, and now will tax the FDIC’s Deposit Insurance Fund even harder over the next couple of years, the major reason why a credit line of $500 billion is currently available if needed.
To understand the difference between the subprime loans and a Alt-A loan, the subprime loan is offered to lower income people in general, while Alt-A loans are used to finance homes for those without regular, predictable paychecks, like those in commission sales jobs. So an ARM with these carry much higher price tags and as a result much higher risk and cost to the buyer and the Deposit Insurance Fund. So even though the areas of the country will be far more concentrated than than subprime loan losses, it’ll still be a huge drain and pressure on the DIF.
We have no way of knowing whether the Deposit Insurance Fund has any capital left in it, as there are estimated reserves and actual reserves, but if they do, it’ll be gone by the beginning of 2010. This is the reason of the meeting at the end of the month to decide how to replenish the DIF. We could find out that they are already out if they start to tap into their Treasury credit line.
Another major catastrophe about to happen is the similar circumstances surrounding commercial loans, which many are in major default already, and will get much worse over the next couple of years.
To show how bad it’s going to get, in San Francisco, the majority of re-sets haven’t even happened yet, and already 27 percent of all option ARM loans are over 90 days late in the five-county area of the city, or in foreclosure.
Why this is bad, as mentioned above, is this will be an unfolding process over a period of several years, and will still be going on when the commercial loans start to default in a big way.
The only thing that could prevent this from happening would be for home prices to rise sometime before the re-sets come due. If not, the amount of the loan versus the value of the home is such a large gap now, it will be impossible for the vast majority of homeowners to refinance, as they would have to pay the difference with cash to do it. That’s not going to happen.
What else will eventually arise is another outrage if what will be considered wealthy people being bailed out by Americans if the government attempts to intervene in any way. Even if they were able to, it’s not likely they will.
So starting in just a few months, the default on high-end homes with ARMs will begin, and it’ll go on for the next four to five years, barring a recovery in the housing market.
Some think this will be very regionalized, and it will, but their conclusions are it won’t have an effect on other areas of the country, which won’t be true at all. The homes will be largely localized in a smaller number of large regions, but if the government ends up intervening for these wealthy people, it’ll affect us all for years to come.
Before it’s all through, San Francisco won’t be the only place people leave their homes … and hearts.
