Alt-A Looking A Lot Like Subprime

In the subprime sector, as the financial woes increased, a number of things happened: 1) lenders and lending units were sold, and consolidated, then 2) lenders started going bankrupt, then 3) subprime loan dollars dried up.

There are signs that this same pattern is starting now in the Alt-A sector. In an article on Reuters, it's been announced that Impac will buy out fellow lender, Pinnacle. Both of these companies are fairly big players in the Alt-A market. The new consolidated company will be a truly national player in the mortgage lending business.

Don't know what subprime and Alt-A are? These are designations for types of borrowers. Subprime borrowers are the "true" high-risk folks, who have a credit rating of 620 or less. Alt-A are "low prime" borrowers, who have a credit rating between 620 and 650, and are most likely having problems documenting their income. Think folks who are self-employed, earn commissions, or are new to the workforce and have no track record to speak of.

Back to the subprime discussion: when lending in the subprime sector, companies have traditionally mitigated their risk on mortgage loans by higher interest rates. However, this strategy stopped working as the subprime problems got worse. After all, higher interest rates create higher payments for the borrowers, who are already on shaky credit ground. Then, more borrowers default and enter foreclosure. This means that lenders have a liability -- a property -- that they have to sell to cover their losses. If the loss cannot be totally covered, the lender needs to find other ways to make more money. That can mean services turn into fees, and even higher interest rates.

The end result of this spiral is a no-win for both borrower and lender. As hiking interest rates and raising fees ceased to be an option, lenders in the subprime sector started to consolidate. The idea was to reduce the risk of financial problems through a larger organization. Unfortunately, this too didn't work.

We may just be seeing the beginning of the same pattern in Alt-A. That's not a good sign. There could be more problems in the housing sector yet.

The good news for buyers is that house prices are coming down -- although not as much as I'd expect -- as the credit and lending shake-out continues. The good news for borrowers who are able to qualify for prime loans is that the lenders who remain are working harder for your mortgage business. There are less mortgage dollars available in general, and that is what is heating competition up. Just yesterday we saw announcements of mortgages without fees, and new mortgage options that actually save consumers money.

If your mortgage is coming due, all this is really good news for you, and signals the time to shop around. Get a few quotes: I'm sure any sponsor from our site will be happy to see you. Do your legwork online, and save yourself time and effort. Make the lender work for your business! You are the cashflow that keeps that lender alive.

Michael Chantrel 

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