Alt-A Mortgage Market May Be Hit Next, Expert Warns

Grim as the bad credit mortgage crisis already is, it’s soon likely to spread to a slightly higher tier of home loans known as Alt-A mortgage loans.

That’s according to the warnings of a respected economist affiliated with the University of California at Los Angeles.

“The question is to what extent,” David Shulman, a senior economist with the UCLA Anderson Forecast in Los Angeles, said. “That could be the next shoe to drop. Certainly, it’s a very reasonable concern.”

California is home to half of the 20 biggest U.S. bad credit mortgage lenders, such as New Century, which filed for bankruptcy protection yesterday and has spawned a wave of concerns in financial markets.

The deteriorating subprime mortgage industry sparked a probe by the California Attorney General, Jerry Brown, and Congress is considering regulations to tighten lending standards for such mortgages.

Subprime home loans, a term applied to some of the riskiest home financing mortgage products, are typically made to those borrowers with poor credit or extremely high debt burdens.

By contrast, Alt-A loans made to people who are considered good credit risks, but who may lack documents needed to qualify for conventional loans.

Therefore, an Alt-A mortgage provider is most likely to provide no doc loans to a borrower with good credit but who cannot or does not wish to provide items such as income verification.

UCLA Anderson Forecast lowered its prediction for housing starts this year to 1.33 million units from a previous estimate of 1.48 million units. In all, constructors broke ground on new homes at a 1.53 million clip in the month of February.

Lawmakers have criticized the Federal Reserve and other bank regulators in recent weeks for allowing too many borrowers to get mortgages they couldn’t afford to repay.

Tom Marano, head of the mortgage business at Bear Stearns Cos. in New York, said on March 29 that he doesn’t see a significant risk of the subprime lending problem spreading to other parts of the mortgage market.

Shulman disagreed.

“We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole,” he wrote as part of the UCLA Anderson Forecast is affiliated with the University of California at Los Angeles and is located at the UCLA Anderson School of Management.

SOURCE: Bloomberg News