Alt-A Mortgage Problems Beginning to Surface
Turmoil in the mortgage market is ensnaring more companies who lend to people with decent credit.
The newfound spread of home loan lending woes beyond loans to those with weak credit scores threatens to reduce the availability of home loans for some consumers and even threaten the existence of some lenders.
Rising delinquencies and defaults among subprime borrowers - those with bad or poor credit histories - have resulted in more than two dozen mortgage lenders officially going out of business, filing for bankruptcy protection or even putting themselves up for sale.
Now the so-called Alternative-A (Alt-A mortgage) sector, which loans to borrowers with better credit than subprime borrowers but not quite prime, is starting to hurt.
One Alt-A lender, American Home Mortgage Investment Corp. of Melville, N.Y., announced late last week that it was having trouble selling its mortgage loans into the secondary market and would have to cut its earnings forecast for the quarter and the year.
At least five analysts downgraded the Alt-A mortgage firm stock on Monday, and its shares fell more than 15 percent on the New York Stock Exchange. The shares fell an additional 6 percent Tuesday to $20.60.
Other Alt-A mortgage lenders that have taken hits in the market in recent days are First Horizon National Corp. of Memphis, Tenn., which some think may be forced to sell out to a bigger bank, and M&T Bank Corp. in Buffalo, N.Y.
Guy Cecala, publisher of Inside Mortgage Finance Publications in Bethesda, Md., said a “backlash” from the turbulent market for bad credit home loans and the recent meltdown therein is a large part of the equation.
“While you’re starting to see some deterioration of the quality, it’s not so much that investors should be dumping (mortgage-backed securities),” he said.
“But nobody wants to own a security that goes down in value, whether because of public perception or the reality of the market.”
Doug Duncan, the chief economist for the Mortgage Bankers Association in Washington, D.C., said that Alt-A mortgages made up a small share of the U.S. market at about 6 percent of outstanding home loans.
Home loans to prime customers, who are the most credit worthy, still make up 74 percent; those to subprime borrowers are about 11 percent, and government-backed loans total about 9 percent.
Alt-A borrowers traditionally had credit scores as high as prime borrowers, but often provided less documentation of their finances and income.
In recent years, however, some Alt-A borrowers have had credit scores closer to subprime borrowers and still were allowed to skate by on no doc loans.
The extent of the mortgage sector’s woes remains to be seen.
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