Is a New Group of Borrowers About to Fall Behind?

For months, we’ve watched the painful subprime loan fallout–and waited for it to end. However, the current mortgage market mayhem may be about to enter its second act.

We’ve discussed concerns about Alt-A loans before. They’re given to borrowers with good credit, who are deemed less of a risk than the subprime set; but there’s a bit of sketchiness to Alt-A loans, because they don’t require the typical documentation to prove income and assets.

And lately, some Alt-A borrowers have been falling behind on payments, too. So is reporting that in the past month, mortgage securities comprised of Alt-A loans have become more worrisome. A few reasons for the growing concern:

  • Recent reports indicate lenders are getting nervous about the Alt-A market. Dow Jones reported
    last week that Countrywide had said it would stop giving
    high-rise condo buyers its Fast & Easy and Alt-A mortgages. (The company
    said the next day that it would approve both types loans.)
  • Slumping securities are not a good sign. In February, securities backed by Alt-A mortgages
    and other home loans to borrowers with decent
    credit declined in value, according to Bloomberg.
  • Securities have been put on notice. Thomson Financial reported Monday that Standard & Poor’s Ratings
    Services had placed its ratings on 1,887 classes of residential
    mortgage-backed securities–which are backed by U.S. Alt-A mortgage loans issued during 2006 and the first half
    of 2007–on CreditWatch with negative implications.

Because Alt-A loans are gathered into securities and sold to investors, a collapse in the Alt-A market could have a similar effect to the subprime disaster. Only it could be much worse because roughly $950 billion of Alt-A mortgage securities are
outstanding; subprime
securities only total about $650 billion.

We’ve all been panicked that upcoming rate resets are going to push more subprime borrowers into default or foreclosure; but the truth is, many subprime borrowers are defaulting before their rates even reset, reports.

Can we expect the same reaction from the Alt-A crowd?