AltA Loans

Alt-A is a catchall category for loans that are typically better than subprime but aren't considered prime, most commonly due to:

  • Incomplete documentation (stated income, stated assets, low documentation, or no documentation) (73 percent of securitized Alt-A loans).
  • Borrower debt-to-income or property loan-to-value ratios too high for the GSEs.
  • Non-owner-occupied (27 percent of securitized Alt-A loans).
  • Spotty credit history—not bad enough to be considered subprime, but not good enough to be prime (Alt-A FICO scores usually between 660 and 735, with an average of 705 for securitized Alt-A loans).

Historically, Alt-A loans were a small niche, typically covering special cases such as self-employed people who couldn 't provide W-2 forms to document their income. But during the bubble, Alt-A became an enormous category, as shown in Figure 4.11.

Because of the fuzzy definition of Alt-A, estimates for the size of the category today vary somewhat, but most are between $1.0 trillion and $1.3 trillion, making it 50 to 100 percent larger than subprime currently, with about half of the loans securitized. (A Goldman Sachs report sizes the Alt-A market at $2.4 trillion because it includes $891 billion of Alt-A loans at Fannie and Freddie and $218 billion held by "finance companies,

Mortgage Origination Ratio

Figure 4.11 Alt-A Mortgage Origination Volume

Source: Inside Mortgage Finance, Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

Figure 4.11 Alt-A Mortgage Origination Volume

Source: Inside Mortgage Finance, Inside Mortgage Finance Publications, Inc. Copyright 2009. Reprinted with permission.

REITs, insurers and other."3 Also keep in mind that many banks label certain loans prime that any unbiased analyst would categorize as Alt-A.).

The collapse of lending standards in the Alt-A category rivaled that of subprime, so it's not very surprising that these loans, especially those written from 2005 to 2007, are defaulting at catastrophic rates, as shown in Figures 4.12 and 4.13 -

At first glance, Alt-A delinquency rates don 't appear to be as bad as subprime, but this has more to do with the structures of the loans: Subprime loans usually reset after only two years, whereas Alt-A loans typically had five-year resets. Thus, as shown in Figure 4.14, Alt-A resets will begin to surge in 2010 (five years after the bubble really started to inflate in 2005) and will continue to rise through 2012.

While Alt-A borrowers generally had higher credit scores than subprime ones, lenders took false comfort in this and thus didn 't verify income or assets as often. Figure 4.15 shows that a far higher percentage of Alt-A loans than subprime ones were low- or no-documentation in four bubble states: California, Florida, Nevada, and Arizona.

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Figure 4.12 Alt-A Mortgage Delinquency Rate

Source: Amherst Securities, LoanPerformance.

0 5 10 15 20 25 30 35 40 45 50 55 60 Months of Seasoning

Figure 4.13 Alt-A Mortgage Delinquency Rate by Vintage

Source: Amherst Securities, LoanPerformance.

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1st Reset

Figure 4.14 Alt-A Monthly Mortgage Rate Resets Source: Credit Suisse, LoanPerformance.

1st Reset

Figure 4.14 Alt-A Monthly Mortgage Rate Resets Source: Credit Suisse, LoanPerformance.

California Florida Nevada Arizona

Figure 4.15 Alt-A and Subprime Low-Doc and No-Doc Mortgages by State

Source: Federal Reserve Bank of New York (www.newyorkfed.org/mortgagesmaps), LoanPerformance.

California Florida Nevada Arizona

Figure 4.15 Alt-A and Subprime Low-Doc and No-Doc Mortgages by State

Source: Federal Reserve Bank of New York (www.newyorkfed.org/mortgagesmaps), LoanPerformance.

Contrary to popular perception, it wasn 't subprime loans but rather Alt-A ones that brought down Fannie and Freddie. For example, Fannie had $292 billion of Alt-A loans as of December 31, 2008, which accounted for 10.1 percent of its single-family mortgage book of business, but they were responsible for 46 percent of Fannie's total credit losses. Subprime loans, in contrast, were only 0.3 percent of Fannie 's book, accounting for 2.0 percent of losses.

The fact that there is greater room for fraud and misrepresentation with Alt-A loans offsets the advantage of higher FICO scores to the point where ultimate losses among Alt-A loans may rival those of subprime, something the market does not yet seem to have factored in. For example, Goldman Sachs estimates that losses among subprime loans will be 32 percent versus only 11 percent for Alt-A loans.4 While some Alt-A loans are of somewhat higher quality—whereas pretty much all bubble-era subprime loans are toxic—we expect Alt-A losses to be at least double what Goldman Sachs is projecting.

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Responses

  • Isauro
    What are AltA loan rates in FL?
    8 years ago
  • toini
    What percent of subprime loans were no doc?
    8 years ago

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