Alt-A Mortgage Market: To Face Fate of Subprime Loans?
Moody’s Investors Service described some so-called Alt A mortgages as no better than subprime home loans, and said it will change how it rates related securities after failing to predict how far delinquencies would rise.
The ratings company said today its expectations for losses on Alt A mortgages will increase by 10 percent to 100 percent, depending in part on how many mortgages in a loan pool were extended to borrowers with low credit scores and little money for down payments.
It’s also raising loss expectations on loans in which borrowers don’t fully document incomes or have “limited homeownership experience.”
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” Marjan Riggi, Moody’s senior credit officer, said in a statement. “Absent strong compensating factors, we will model these loans as subprime loans.”
A declining appetite for debt backed by riskier mortgages, along with an increase in caution from New York-based Moody’s and rivals, is making it more difficult to get loans, adding to pressure on the U.S. housing market. Home prices in 20 cities dropped 2.8 percent in May from a year earlier.
“Non-prime” loans comprise about 13 percent to 14 percent of all outstanding home mortgages, Federal Reserve Bank of St. Louis President William Poole said in a speech this month.
Loss Projections
Moody’s said in a separate statement that its expectations for losses on option adjustable-rate mortgages, part of the Alt A market, would rise even farther. Initial minimum payments on the loans fail to cover the interest borrowers owe, creating growing balances and possible payment spikes.
About $400 billion in Alt A mortgages were packaged into bonds in 2006 with about $40 billion of those mortgages sharing subprime characteristics, Moody’s said.
“What is triggering this is the weakness of the housing market and the weakness of the mortgage market,” said Warren Kornfeld, a managing director in Moody’s structured finance group, during an interview today.
The worst Alt A loans account for 25 percent to 50 percent of the increased loss projections, Kornfeld said, even though they make up only 10 percent of the principal.
The level of foreclosures and then losses that rating firms expect on a pool of loans affect how much of the debt created in a securitization gets the best ratings. Investors typically demand lower yields on higher rate debt, making it more valuable. Lenders may compensate for changes in the yields needed to sell bonds by raising rates charged to borrowers.
Above Subprime
Alt A mortgages fall just short of the typical standards of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, the two largest mortgage companies. They’re supposed to be a credit class above subprime loans, given to borrowers with poor credit or high debt.
More than $800 billion of subprime mortgage bonds and $700 billion of Alt A bonds are outstanding, according to a March report by Zurich-based Credit Suisse Group. Of the Alt A bonds, more than $200 billion are backed by option ARM bonds.
Alt A mortgages are usually granted to borrowers with good credit records who seek atypical underwriting or loan terms, such as reduced proof of their income.
The home loans are often used on investment properties. Such flexibility is given on prime loans, with the lowest rates, if consumers have enough offsetting positive attributes, such as cash in the bank.
SOURCE: Bloomberg News