Loading ...Ok, so by now you know what sub-prime loans are. Now the default rate has risen on the next level of loans, the so-called Alt-A loans. Basically, “A” paper loans are standard, traditional loans with normal underwriting made to borrowers with good credit, strong income, and stable employment. Alt-A loans are the next level. They are not the “subprime” loans we have heard so much about, but are riskier loans to people with decent credit, but who are taking on more debt than would normally be allowed given their income. Bridge loans and other temporary loans would fall into this catagory.
Now, it appears that default rates on Alt-A loans is rising as well. This is having an impact because most loans are securitized, or bundled and sold as pools of loans to large investors. Because the default rate is rising, investors are demanding higher yields to compensate for the increased risk. The net result is likely higher rates, at least in the Alt-A catagory.
Alt-A loans are made to borrowers with credit ratings that fall between prime and subprime, or to homeowners who have prime credit but are seeking a somewhat riskier loan.
Such loans made up about 10 percent of all mortgages outstanding at the end of 2006 and made up about 18 percent of home loans written last year, according to Moody’s Economy.com.
Together, subprime and Alt-A loans account for about 21 percent of loans outstanding and 39 percent of mortgages made in 2006.
The delinquency rate for Alt-A mortgages remains much lower than the rate for subprime mortgages, but it has been rising. In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.22 percent a year before, according to FirstAmerican LoanPerformance. By comparison, 12.44 percent of subprime loans were delinquent by more than two months, up from 7.84 percent.
Reports that Wall Street, which made millions of dollars securitizing mortgages in recent years, is becoming more wary of Alt-A by putting loans back to lenders or by bidding less for them could be an indication that default rates will worsen before they improve.
The problems in subprime mortgages started late last year when big investment banks started returning delinquent loans to lenders. Many of those lenders have since filed for bankruptcy protection.
So far so good in Pleasanton and the Tri-Valley. A strong Spring selling season has made the prime bay area markets, such as the penninsula, S.F., south bay, East Bay, and Marin, vibrant and solid. The secondary markets, namely the central valley and the Sacramento valley, are struggling, and are much more likely to be impacted by the mortgage troubles.
Courtesy of the New York Times.
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