Subprime Lending Woes Spreading to Alt-A?

Here's a story I couldn't find in a "big media" outlet, but people should be screaming about: according to an article by the OC Register, there are signs that not all is well with borrowers who have credit risk scores just above the subprime level. This credit category is called "Alt-A", and is just above that magical 620 credit score level. We might call this the "low prime" borrowers. These folks are starting to miss more loan payments, and are showing lots of signs of borrower distress.

In fact, lenders in the Alt-A sector are now taking action to try and stem losses, just as we've seen in the subprime sector.

Lenders have been making a lot of money with the Alt-A group - much as they have with the subprime group. Last year alone, Alt-A was responsible for $90 billion in loans for the biggest player in the field, Pasadena-based IndyMac. But even these loans are being looked down on in the investment world; delinquent Alt-A loans can't even be sold to hedge funds for more than pennies on the dollar, according to IndyMac's CEO, Michael Perry. IndyMac hasn't sold any delinquent loans as a result. However, the delinquencies within IndyMac are sky-rocketing. In the first quarter, they had ballooned a whopping 75 percent higher.

IndyMac said there's no reason for a "fire sale" in delinquent loans. However, if IndyMac is going to work through these loans themselves and then sell, they better hurry. It looks as if the Alt-A sector could be quickly suffering the same problems that have plagued the subprime sector, including higher than normal delinquency rates and more foreclosures. As it is, all indicators point to loss reserves being too low within companies like IndyMac for the pace of delinquencies. Too low loss reserves have plagued many subprime lenders, including New Century Financial which was one of the biggest players, and which is now in bankruptcy. 

How is it that Alt-A is in the same pickle as subprime? The same problematic loan practices: too many loans written to borrowers with little or no down payment combined with little or no proof of income.

Some analysts are implying that the whole mortgage business model is flawed. Loans that might otherwise be sold as an asset are vulnerable to what investors are willing to pay. Losses, bankruptcies and layoffs at companies that buy and sell loans can drastically affect the price they can get. Further, a housing downturn has put a whole new spin on what a loan is worth, as the value of the home it represents drops.

You thought the subprime meltdown was messy? If Alt-A goes bad, the implications could be far worse.

Michael Chantrel 

 

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