Thursday, June 4, 2009 | Two years after poor-credit borrowers fell into foreclosure due to skyrocketing mortgage payments, trouble is growing in another category of loans, threatening to exacerbate the local housing crisis.

A step above subprime, the category known as Alt-A consists of high-risk loans for good-credit borrowers who purchased more expensive homes. Good-credit borrowers could get a loan without providing stacks of income and asset documentation. This was also the category for popular pay-option loans, in which some borrowers don't even begin paying off the loan principal for several years.

More than 25 percent of the county's Alt-A loans were at least 60 days delinquent in March. That's a huge increase from a year ago, when 12 percent of the outstanding Alt-A loans were at least that far delinquent, according to LoanPerformance data from First American Core Logic.

A bigger portion of subprime loans are that far behind on payments, but the increase was much smaller in the last year. This March, 38.5 percent of the active subprime loans in the county were at least 60 days delinquent — up slightly from 33 percent in March 2008.

There are more active Alt-A loans than subprime. Of all of the active mortgages in San Diego County, 7 percent are subprime, and 14 percent are Alt-A. The other 79 percent are prime, typically more conventional loans.

That's what makes the increased trouble in the Alt-A category worrisome to local analysts. The fallout from subprime has devastated some neighborhoods and has intensified the housing crash. Now analysts are trying to gauge the potential impact of defaults in that bigger Alt-A category — what has been called the next wave of potential foreclosures.

The new numbers show much more rapid failure in a bigger category of loans amid an ever-worsening economy — and thus signify a potentially calamitous impact on the local housing market, which has just begun to get its bearings from the subprime thumping it received. Analysts say these are the numbers that law- and policymakers are watching as they draft new incentives for banks to work with homeowners; these data show the looming number of potential foreclosures that might be downsized with loan modifications and workout programs.

As is now well-known, subprime loans seduced borrowers with poor credit who would otherwise not qualify for a mortgage into homeownership. The loans' introductory period carried low monthly payments for several years, and the borrowers counted on refinancing at the end of that period into a more conventional loan, using the equity they'd gained as their home appreciated in the housing boom. The crisis came when the borrowers got to the end of that period and could not refinance, because the market had stopped rising meteorically. Their payments doubled or tripled, and thousands such borrowers just walked away.

Many of those promises held for Alt-A borrowers, too. People with good credit could buy a bigger or more expensive house than they'd be able to qualify for with a conventional loan, all the while banking on the appreciation of their houses during the introductory period. Plus, the loans required less documentation.

"The process of getting an Alt-A loan was so much easier and often cheaper than getting a prime loan," said Mark Goldman, a local mortgage broker who teaches real estate at San Diego State University. "There were a lot of people who went into those."

But now, many Alt-A borrowers are falling behind on their loans as they grapple with making introductory payments on a mortgage for much more than they could sell for.

One big factor in the local housing market: When adjustable-rate mortgages hit the point when borrowers have to start paying principal along with their intro payments. The bulk of those — across all loan types — will happen in the next two years.

Nearly 45,000 adjustable-rate loans of all types have already hit the payment-shock point in San Diego County in recent years, according to LoanPerformance. In the next year, another 24,638 will hit that point, followed by another 95,209 the year after that.

In more than 25,000 Alt-A cases, the loans haven't hit that recast point, but already homeowners are facing the fact that their mortgages are worth more than their houses could sell for. By the end of last year, 31 percent of homeowners with a mortgage in San Diego County were upside-down.

Dave McDonald, a local mortgage broker and president of the San Diego chapter of the California Association of Mortgage Brokers, said he's been hearing from clients with Alt-A loans.

Now, their homes are worth $200,000 less than their mortgages, in some cases. Even though mortgage rates are relatively low, their loans can't be refinanced because they're too far upside-down, he said.

"What's kind of scary to me is that these people are calling me, asking, 'Should I stop making payments?'" McDonald said. "They're literally stuck, and stuck with very few options other than a short sale or a foreclosure."

This pessimism comes amid frenzy at the bottom of the market and bidding wars for the foreclosures that have already hit the market. Some real estate observers have begun to wax optimistic about the local market — saying a recovery is imminent and the pain is largely past for San Diego County.

But McDonald's conversations with these better-credit borrowers who are now grappling with their loan-to-house value ratio make him skeptical of those reports — though the increased activity is good for real estate professionals.

"I don't buy the recovery," he said. "The numbers don't justify anybody coming out and saying we've hit the floor."

But as the Alt-A trouble adds to rising unemployment and other bleak economic news, it doesn't warrant much extra concern, Goldman said.

"As worried as I am about the rest of the world collapsing, I'm thinking yeah, that's important, but it's just another log on the fire," he said.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.