Alt-A loans the next crash?

Discussion in 'Wall St. News' started by blast19, Mar 19, 2007.

  1. blast19


    This is the one I've been waiting for to come to the forefront:

    The next mortgage meltdown?
    'Liar loans', where borrowers gave little proof of income, could be the next big threat to real estate market.
    By Chris Isidore, senior writer
    March 19 2007: 1:06 PM EDT

    NEW YORK ( -- Subprime mortgages have been generating a lot of attention, and worry, among investors, economists and regulators, but those loans may be only part of the threat posed to the housing market by risky lending.

    Some experts in the field are now concerned about the so-called Alt. A mortgage loan market, which has grown even faster than the market for subprime mortgage loans to borrowers with less than top credit.
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    Alt. A refers to people with better credit scores (A-rated) who borrow with little or no verification of income, or so-called alternative documentation.

    But some people in the industry call them "stated income" loans, or worse, "liar loans." And they were an important part of the record real estate boom of 2004 and 2005 that has recently shown signs of turning into a bust.

    Standard & Poor's estimates that the Alt. A market has gone from less than $20 billion in loans in the fourth quarter of 2003 to more than $100 billion in each of the last three quarters. Overall, new Alt. A loans totaled $386 billion in 2006, according S&P's estimates - up 28 percent from 2005.

    By comparison, subprime loans reached $640 billion in 2006, according to trade publication Inside Mortgage Finance.

    But just as the Alt. A market has grown even faster than subprime, some believe it could shrink even faster amid growing concerns in the marketplace. That means another pool of money that has supported home sales and housing prices being yanked just as home sales and prices are already in decline.
    Top 10 foreclosure markets

    The loans were very popular among home buyers who were in the market for an investment property, rather than a home that they intended to live in. And while the default and deliquency rates for Alt. A are only a fraction of the rates for subprime, the widespread use of the loan by investor buyers is a concern, given the glut of homes and condo bought by those investors which are now sitting on the market without buyers - and with prices falling sharply in many markets.

    "There's a reason they ask on the application do you intend to live in the property," said David Berson, chief economist for mortgage financing firm Fannie Mae (Charts). "People who live in a property are less likely to default than investors."

    Still, Berson said that while default rates are likely to rise for many Alt. A loans, he doesn't think it will reach the levels seen in the subprime sector. He said only 1.5 percent of Alt. A loans are now 60 days or more delinquent, while in subprime it is 7.5 percent. Absent a major recession, he doubts that Alt. A loans will reach the same kind of deliquency or default rates causing worries and lender bankruptcies in subprime.

    But many in the field say that there is a real squeeze on Alt. A loans as lenders tighten up on underwriting standards. Mitch Ohlbaum, president of mortgage broker Legend Mortgage whose business was about 55 percent Alt. A, said he's seen a dramatic change in the business the last few years, and its now swinging back away from the loans.

    "Stated income borrowers were typically self-employed people who write off a lot of income, so their tax return really don't reflect what they're earning," said Ohlbaum. But he said the loans have grown in popularity for folks who had no money to put down on a home, or could only pay interest on a loan, especially by real estate investors.

    "All that nutty stuff is going to disappear," said Ohlbaum. "Everyone today is shying away from the 100 percent of value loan. But anytime there's a big change in the market like there is now, everyone will overcompensate for a while. I think this will last for 12 to 14 months before things are back to normal, and I think you'll see more foreclosures, more people in trouble in the meantime."

    And he said some types of Alt. A loans that had become popular, such as the no-money-down loans, are almost impossible to arrange today. And the definition of what is considered an A-quality borrower has tightened up.

    The biggest Alt. A lender is Pasadena, Calif-based IndyMac Bancorp. (Charts) Trade publication Inside Mortgage Finance estimates it did $70.2 billion of the loans in 2006, up 48 percent from a year earlier. As the sector grew, its shares shot up nearly 50 percent in a year and hit a record high in April 2006. But with rising concern about the mortgage sector, its shares have plunged 36 percent since the start of 2007.

    But it's not just the smaller lenders like IndyMac in the sector. Like subprime, some of the nation's largest finance firms are major players. Countrywide Financial (Charts), one of the nation's largest mortgage lenders, is the No. 2 Alt. A lender with $68 billion in loans, according Inside Mortgage Finance.

    GMAC, the finance unit of General Motors (Charts) that is now 51 percent owned by Cerberus Capital, is No. 3 on the list at $44 billion, and a unit of General Electric (Charts) is No. 4 at $28.3 billion, just ahead of Washington Mutual (Charts), the nation's largest thrift with $25 billion in the loans. Top of page
  2. blast19


  3. Would you do a deal with Angie?
  4. blast19


    Angelo is not standing for reelection on the Home Depot BOD yeterday as well which is another bad sign in my opinion. Staying on would have been a less conspicuous move.