Alt-A Loans – A New Term

As if the sub-prime mortgage mess isn’t putting enough of a drag on the economy, we now find out about Alt-A loans here.

Alt-A loans are defined as

Alt-A loans are made to borrowers with generally strong credit but are loans that lack adequate verification, for instance, of income or assets. The lax paperwork paved the way for aggressive lending to the less creditworthy and emboldened borrowers to exaggerate their financial prowess.

In 2006, $612 billion of Alt-A mortgages were underwritten, according to National Mortgage News, a trade publication, while in 2007, there were an estimated $400 billion.

Pools of these loans are bundled into securities called mortgage bonds and sold to investors. It is these bonds that have lost value in the past month amid heightened concerns around Alt-A loans.

[snip]

“Generally speaking, I do not believe Alt-A credit is any better than subprime,” said Alan Fournier, the managing member of Pennant Capital Management LLC in Chatham, N.J. “The performance of this market doesn’t surprise me, given what’s happening to home prices and credit availability today.”

Where the concern enters the picture is here

The Alt-A market began sliding a year ago as a surprising number of borrowers began to default, but it fell even more dramatically in the fourth quarter of last year. The default rate on these loans has doubled every month for the past 12 months. And as bad as all that sounds, it’s only expected to get worse.

“It’s grim, and it’s going to get grimmer,” said Michael Youngblood, a managing director at FBR Investment Management Inc. in Arlington, Va.

When we add the cumulative effects of the sub-prime mess and the Alt-A debacle that is beginning to unfold, one must wonder how many banks and other mortgage makers are going to fail in the coming months. Countrywide is only the tip of the iceberg.

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