Subprime, Alt-A and Option ARM

Apparently, Subprime is only the 1st wave of loan defaults to hit the US. There is a 2nd wave, consisting of Alt-A and Option ARM loans. Check out this video snippet from 60 minutes.

Current “Subprime” defaults

Subprime = loans to least credit-worthy people

In a few years
Projected “Alt-A, Option ARM” defaults

Alt-A = Alt-A loans are primarily credit-score driven, as its borrowers don’t have proof of income from traditional employment.

Option ARM = Option adjustable rate mortgage ~ low initial annual interest which resets after 3-5 years

Combined Chart by Credit Suisse

If the above is true, it’s good news for property buyers down the road, bad news for people who bought other properties for investments.

Generally though, it’s bad news for the world (especially Singapore), as the US mess will affect the rest of the world. This might mean a higher rate of retrenchments, unemployment, but hopefully not too serious a domino effect.

Hopefully the Obama Administration is aware of this, and have plans to prevent the 2nd wave from happening.

Related Articles:
– “The Next Housing Catastrophe Waiting to Strike” by Kristin Graham (link)
– “Alt-A Loans Spiraling Downward” (link)
– “Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected” by Paul Jackson (link)

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