Alt-A Mortgage Loans: The Next Problem Area?
Subprime (bad credit mortgage) loans have certainly been generating a lot of attention, and worry, among investors, economists and regulators, but those loans may be only part of the threat posed to the housing market by risky lending.
Some experts in the field are now concerned about the so-called Alt-A mortgage loan market, which has grown even faster than the market for subprime mortgage loans to borrowers with less than top credit.
Alt-A refers to people with better credit scores (A-credit) who borrow with little or no verification of income - so-called alternative documentation.
But some people in the industry call them “stated income” loans, or worse, “liar loans.” And these almost no-doc loans were an important part of the record real estate boom of 2004 and 2005 that has recently shown signs of turning into a bust.
Standard & Poor’s estimates that the Alt-A market has gone from less than $20 billion in home loans in the fourth quarter of 2003 to more than $100 billion in each of the last three quarters.
Overall, new Alt-A mortgage transactions totaled $386 billion in 2006, according S&P’s estimates - up a drastic 28 percent from 2005.
By comparison, bad credit home loans reached a whopping $640 billion in 2006, according to trade publication Inside Mortgage Finance.
But just as the Alt-A market share has grown even faster than the bad credit home loan market, some believe it could shrink even faster amid some of the concerns in the marketplace right now.
That means another pool of money that has supported home sales and housing prices being yanked just as home sales and prices are already in decline.
The loans were very popular among home buyers who were in the market for a real estate investment property, rather than a home that they intended to live in.
And while the default and deliquency rates for Alt-A are only a fraction of the rates for subprime, the widespread use of the loan by investor buyers is a concern, given the glut of homes bought by those investors which are now sitting on the market without buyers.
“There’s a reason they ask on the mortgage application do you intend to live in the property,” said David Berson, chief economist for mortgage financing firm Fannie Mae. “People who live in a property are less likely to default than investors.”
Still, Berson said that default rates are likely to rise for many Alt-A loans, he doesn’t think it will reach the levels seen in the subprime sector.
He said only 1.5 percent of Alt-A loans are now 60 days delinquent or more, while in subprime / bad credit mortgages it is 7.5 percent.
Absent a major recession, he doubts that Alt-A loans will reach the same kind of deliquency or default rates causing worries and mortgage lender bankruptcies in subprime.
But many in the field say that there is a real squeeze on Alt-A loans as lenders tighten up on underwriting standards. Mitch Ohlbaum, president of mortgage broker Legend Mortgage whose business was about 55 percent Alt-A, said he’s seen a dramatic change in the business the last few years.
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