About US$1 trillion of what are called Alt A mortgages are outstanding. These are what are often called Low Doc loans as the income of the borrower is not verified. The lender relies on largely on the word of the borrower.
I have seen various surveys that suggest 70% of Alt A borrowers lied about their income, and they probably didn’t understate it. Another suggested 25% of these borrowers overstated their income by 50% or more.
Watch out as the slowing economy starts to impair the ability of these people to pay and the housing slump reduces the value of the collateral further. Its the next mortgage credit problem that will hit the US. Hopefully the banks are making loan loss provisions and keeping capital in reserve to deal with this forth coming problem.
Sorry to be so negative but its going to be ugly for some time yet but we should see improvement, possibly starting in 2009. In the mean time, cautiously look for opportunities!
Cheers
Tom the money man
