Investing In Lenders: Alt-A Risk, Too
By Ian Cooper
It’s just not the sub-prime lenders that have to worry any more. Alt-A mortgage companies, which provide mortgages to borrowers that fall between prime and sub-prime, are also at risk.
While Alt-A loans are less risky that sub-prime, as soon as the housing market began to cool, and loan volume began to pull back, some Alt-A lenders lowered their lending standards, thereby raising their risk. Over the last 14 months alone, the Alt-A default rate has doubled. (Note: sub-prime loans are offered to low-income buyers with poor credit. And while Alt-A mortgage lenders do extend monies to borrowers with clean credit, the borrowers don’t have to provide proof of income or assets.)
Says UBS (as quoted by the Wall Street Journal), “The credit deterioration has been almost parallel to what’s been happening in the sub-prime market.” Four hundred billion dollars in Alt-A loans were originated in 2006 alone, accounting for 13.4 percent of all mortgages offered in 2006. That’s up from the 2.1 percent of originated 2003 Alt-A loans, according to reports.
Worse yet, according to a Bear Stearns analyst (as referred to by FirstRung.com), “the sub-prime sector will shrink by nearly a third this year, down by $180bn, while Alt-A lending will fall by 25%, over $100bn.”
It’s a fact. Sub-prime was just the tip of the iceberg (massacring stocks like New Century and Accredited Home; both Death Cross Trader put option plays). But just wait until the Alt-A mortgage lenders start diving.
Take care,
Ian L. Cooper, Editor, Death Cross Trader