Deterioration of the Alt-A mortgage market - Posted by Ben Carmona

Posted by Ed Garcia on August 05, 2007 at 23:22:54:


Wow, youâ??re going to keep me up all night trying to answer your post.

I didnâ??t mean to get into a shoot out between Alt-A and Sub-prime definitions. Of course they are different products but are so close, brokers usually refereed to them as Sub-prime.

I think we both know the difference, however in the lending community credit worthiness is not always someone who has less then desirable credit or credit issues. Lack of verifiable income is also a defamation of credit worthiness (The Ability To Pay) This is reflected in the cost of the loan as well.

From my stand point the common denominator of these two products are they are both security backed and sold to Wall Street. This is where the problem lies.

Here are two articles you may or may not have seen that I would like to share with you and our viewers.

Alt-A mortgage losses accelerate, study says
Growing Alt-A problems could threaten some mortgage-backed securities
By Alistair Barr, MarketWatch
Last Update: 2:05 PM ET Mar 13, 2007

SAN FRANCISCO (MarketWatch) - Losses on so-called Alt-A home loans are accelerating and could hit the value of lower-rated portions of some mortgage-backed securities, according to a study released on Tuesday.
Alt-A loans are considered less risky than subprime mortgages, but usually have lower credit quality than “prime” loans. Companies such as IndyMac Bancorp (NDE :

FAF43.00, -1.05, -2.4%) .
This “alarming” deterioration could have dire consequences for some investors in the BBB- rated parts of mortgage-backed securities (MBS) that contain these types of loans, but the market hasn’t priced these risks in yet, Liu warned.
Losses “could potentially wipe out most of the credit support on BBB- rated bonds backed by Alt-A hybrids,” Liu wrote. "And yet we have not seen any spread movements that suggest investors are taking this into consideration."
Liu’s study, which used LoanPerformance data from the end of January, is based on the housing market remaining relatively flat over the next few years.
“If house prices fall over the next few years, everything in this scenario will be much worst,” he said in an interview.
Alt-A loans were originally designed for borrowers with clean credit records, but with other issues that often meant they provided fewer documents or even no documents showing what they earned. These loans were attractive to investors in mortgage-backed securities because they offered higher yields than traditional “prime” home loans, but were underpinned by the cleaner credit records of the borrowers.
The popularity of Alt-A mortgages exploded in recent years. A record $400 billion of these loans were originated in 2006. They accounted for 13.4% of all mortgages offered last year, up from 2.1% in 2003, according to industry publisher Inside Mortgage Finance.
But as the Alt-A business grew, more of these loans were offered to less creditworthy borrowers and the products became more exotic.
“The Alt-A sector is the poster child for the past decade’s tremendous growth and drastic evolution in the mortgage market,” Liu wrote in the LoanPerformance study.
Alt-A ARM IO loans have “taken the leading role within continuously expanding borrower leverage in the runaway housing market,” he added.
Three quarters of all Alt-A loans originated in 2006 were innovative mortgages such as interest-only loans and option ARMs, he noted.
As ARM IO mortgages took over as one of the dominant ARM products, the performance of these loans deteriorated rapidly, Liu said.
The main reason is that the housing market is much weaker than it was a few years ago and interest rates are much higher, Liu explained. “On top of that, underwriting standards were looser recently,” he added.
MBS 'endangered’
The deterioration is “alarming” for investors in lower-rated bonds that are backed by these loans, he said.
Mortgage loans are usually packaged together and sold as mortgage-backed securities (MBS) to institutions such as pension funds, insurers, and hedge funds.
They are sliced up into different sections, known as tranches. Higher quality tranches pay lower interest rates, but are less likely to experience losses. Lower-rated slices, rated BBB- and BBB, yield more, but are the first to get hit when losses occur in the underlying mortgages.
An extra chunk of cash is included in MBS - called credit support or enhancement - that protects investors against a certain level of losses.
Liu’s study suggests that losses in Alt-A ARM IO mortgages could wipe out the credit support on BBB- rated tranches of some MBS.
“There is a 34% probability that the entire BBB- tranche might get wiped out,” he wrote. "Similarly, there is a 17% probability that cumulative losses reach 300 basis points, which could make BBB bonds appear on the endangered species list."
If the housing market remains flat or turns negative for a prolonged period, losses could rise further, “which will wipe out credit support of BBB bonds on these deals,” he added.
If credit support on these tranches is erased, investors would still have access to the income. But Liu warned that they would likely be downgraded by credit rating agencies anyway, cutting their value.
There are a lot of moving parts in these projections, Liu said, noting that the analysis is “relatively crude.”
“Even so, we believe our results are very powerful and are not currently reflected in the market,” he concluded.
Alistair Barr is a reporter for MarketWatch in San Francisco

S. subprime mortgage crisis
Main article: subprime meltdown
Beginning in late 2006, the U.S. subprime mortgage industry entered what many observers have begun to refer to as a meltdown. A steep rise in the rate of subprime mortgage foreclosures has caused more than two dozen subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation’s second biggest subprime lender.[5] The failure of these companies has caused stock prices in the $6.5 trillion mortgage bundled securities market to collapse, threatening broader impacts on the U.S. housing market and economy as a whole. The crisis is ongoing and has received considerable attention from the U.S. media and from lawmakers during the first half of 2007. [6][7]
Observers of the meltdown have cast blame widely. Some have highlighted the predatory practices of subprime lenders and the lack of effective government oversight.[8] Others have charged mortgage brokers with steering borrowers to unaffordable loans, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the underlying loans. Borrowers have also been criticized for entering into loan agreements they could not meet. [9] Many accounts of the crisis also highlight the role of falling home prices since 2005. As housing prices rose from 2000 to 2005, borrowers having difficulty meeting their payments were still building equity, thus making it easier for them to refinance or sell their homes. But as home prices have weakened in many parts of the country, these strategies have become less available to subprime borrowers.[10]
Several industry experts have suggested that the crisis may soon worsen. Lou Ranieri, formerly of Salomon Brothers, considered the inventor of the mortgage backed securities market in the 1970s, warned of the future impact of mortgage defaults: “This is the leading edge of the storm. â?¦ If you think this is bad, imagine what it’s going to be like in the middle of the crisis.” [11] Echoing these concerns, consumer rights attorney Irv Ackelsberg predicted in testimony to the U.S. Senate Banking Committee that five million foreclosures may occur over the next several years as interest rates on subprime mortgages issued in 2004 and 2005 reset from the initial, lower, fixed rate to the higher, floating adjustable rate or “Adjustable rate mortgage”. [12] Other experts have raised concerns that the crisis may spread to the so-called Alternative-A (Alt-A) mortgage sector, which makes loans to borrowers with better credit than subprime borrowers at not quite prime rates.[13]
Some economists, including former Federal Reserve Board chairman Alan Greenspan, have expressed concerns that the subprime mortgage crisis will impact the housing industry and even the entire U.S. economy. In such a scenario, anticipated defaults on subprime mortgages and tighter lending standards could combine to drive down home values, making homeowners feel less wealthy and thus contributing to a gradual decline in spending that weakens the economy. [14] Other economists, such as Edward Leamer, an economist with the UCLA Anderson Forecast, doubts home prices will fall dramatically because most owners won’t have to sell, but still predicts home values will remain flat or slightly depressed for the next three or four years.[15]
As the crisis has unfolded and predictions about it strengthening have increased, some Democratic lawmakers, such as Senators Charles Schumer, Robert Menendez, and Sherrod Brown have suggested that the U.S. government should offer funding to help troubled borrowers avoid losing their homes.[16] Some economists criticize the proposed bailout, saying it could have the effect of causing more defaults or encouraging riskier lending.
Ben, I have to give you credit, youâ??ve posted 2 well thought out, well worded posts.
The reasons Mortgage Brokers are in such dismay, is because they all basically use the same sources and either sell or broker to lenders that again either sell off in the secondary market to lenders which will sell to Wall Street or sell directly to Wall Street themselves. In either event, the mortgages were ending up in the same place.
One of the things Iâ??ve always done in my workshop is said with all of the hundreds and thousands of lenders in our country, Iâ??d break it down to 8 and categorize them, then explain that they are nothing more then duplications of one another.
Ben, Iâ??m too tired tonight to go into a lot of detail, but your answer is going to be portfolio lenders itâ??s as simple as that. When ever there has been a void in the financial community, someone has always come in and picked up the slack or filled it. I already know who Iâ??m using and how to structure the deals.
Ben, Iâ??m going to bed now, but I want to thank you for the fine job youâ??ve done helping others.

Ed Garcia

Deterioration of the Alt-A mortgage market - Posted by Ben Carmona

Posted by Ben Carmona on August 03, 2007 at 09:43:42:

Over the last several months we seen the collapse of the subprime market which funded loans to those who were credit challenged. More than 2 dozen companies shut their doors while others scrambled to change guidelines which reflected the direction of the upcoming market.

In addition to these changes we’ve seen several states putting in their own legislature to stop reduced doc loans like stated, no ratio, and no doc.

Now the biggest impact has started Thursday, 8/1/2007 that will affect the Alt-A (portfolio) products.

Just a quick breakdown of what Alt-A is.
Lenders sell of their loans in bulk on the secondary market. Normal conforming loans are usually sold of to Fannie/Freddie. The Alt-A loans are purchased by investors on Wall Street because at one time they perceived the risk was worth the yield return.

Alt-A loans were generally made to those with good credit but in need of reduced documentation, high ltv, unlimited properties, or other factors that fell outside of the conforming nature. THIS INCLUDES THE FOREIGN NATIONAL PRODUCTS.

With the current and expected increase in default, the Wall Street investors are no longer interested in purchasing these types of loans from lenders. In fact, some of the investors are now making margin calls to these lenders which could be disastrous.

This week we’ve already had 1 major lender shut their doors and it can be assumed there will be a domino affect.

As of yesterday and early today, almost every lender that once offered an Alt-A loan has either changed the product guidelines completely, pulled their products altogether, or have priced their product incredibly high.

What this means to you as a borrower.

Uncertainty for the next few days to weeks. You should absolutely call your mortgage professional if you are in the middle of a transaction, especially if preapproved. Those prepprovals are potentially invalid now. All loans need to be locked ASAP so they can be grandfathered in with the old guidelines.

Because this just happened, many lenders are still reacting and just making changes. I’ve spent the morning speaking with my contacts within the lenders I use and all have told me that changes to their Alt-A market are coming. Some have advised that their products will be completely pulled.

It appears that the majority of lenders are now looking to originate pure conforming loans which they know can be sold off. My thoughts are that the market is correcting itself and weâ??ll see this continue for a bit. Thereâ??ll probably be some remaining lenders offering Alt-A products but itâ??s tough to say who and what will be offered.

Check out

Feel free to contact me with any questions you may have about the industry changes or a scenario you may be currently involved in.

Ben Carmona

Re: Deterioration of the Alt-A mortgage market - Posted by Ed Garcia

Posted by Ed Garcia on August 04, 2007 at 09:43:45:


Thank you for your up date that was so well put.

I think a blind man could see this coming and it amazes me how the Mortgage Brokers are caught with their pants down. Iâ??m watching Mortgage Brokers who have been in the business 15 years or less, panic and donâ??t seem to have a clue as to what to do or how to restructure.

Itâ??s obvious that these brokers have gotten into a comfort zone with their Sub-prime lenders and must have thought it would never end.

Ben, Iâ??m a little arrogant on the matter because I saw this coming and was doing B and C loans before the term Sub-prime was ever coined. The term Alt A was never really used and has surfaced as a result of this financial crisis.

I personally am glad that this is happening because I was tired of watching deals and financing go together that didnâ??t make economic sense. I was tired of watching brokers abuse financing that served its purpose had it been properly used.

Iâ??d be a liar if I said that it doesnâ??t affect me, of course it does, but I welcome it because I will still do deals when others wonâ??t. When you come from an era of the 20/20 loan, meaning 20% financing and 20 points, whatâ??s happening now is a piece of cake.

As you know the real-estate market was declining prior to the demise of Sub-prime, so the loss of Sub-prime just added fuel to the fire.

Ben, I donâ??t know how long youâ??ve been brokering, but 15 to 20 years ago, brokers more or less specialized in various types of financing. The majority did just Fannie Mae, Freddie Mac, or FHA and VA., or both. I actually built my mortgage company on other mortgage companies turn downs thatâ??s why itâ??s easy for me to have this caviler attitude.

The part of your post that bothers me is the future changes in legislation that will be coming because of the greed of not only the brokers, but the borrowers as well. I think the average Joe who is losing his house and is acting like a victim, he knew he couldnâ??t afford the loan when he took it. For them to say that the broker didnâ??t tell me is baloney, because I donâ??t have to tell you how many disclosures there are in an average loan.

In conclusion youâ??ve given me an idea. Maybe I should do a workshop for just Mortgage Brokers.

Ed Garcia

Re: Deterioration of the Alt-A mortgage market - Posted by Antoinette

Posted by Antoinette on August 04, 2007 at 07:10:44:

So for investment properties in terms of finance, will there be a reduce number of available loans with 0-20% down (meaning instead of sellers being able to offer offering seconds and/ or banks offering seconds on loans), buyers will need to have at least 25% down cash sourced and seasoned? Can you give examples of how the new dti, ltv, finance scenerios will work (are most changing to Fannie Mae conventional finance standards)? As far as getting into real estate, I have waited to see what the mortgage sector has in store as far as financing. Will it be harder to get a mortgage for long term investment properties? For example if I had a $100000 duplex net rent for each side is $545, with full price offer on the table, 3.5% cc paid by seller, what would be a good way for an buyer to finance that particular property, with limited reserves-$5000 or less. Taxes- taxes and insurance $3000 yearly, let’s day credit score of buyer is maybe between 585-625, with dti of 29/41 (before purchase), monthly income of buyer $3500. Just a scenerio.

Re: Deterioration of the Alt-A mortgage market - Posted by cork horner

Posted by cork horner on August 07, 2007 at 14:46:26:

Ed—Hello from San Diego…Home of the residential crash!

Yup–I agree with your perception 101%, that the borrowers in trouble knew it on Day 1…And–the ‘brokers’ knew it was an accident waiting too.

Ahh, those ‘liar loans’…

i just performed a lease option deal for a win-win down the road.

cork horner
san diego


You ready to do 65-70% bailout preforeclosures or reo’s?

Re: Deterioration of the Alt-A mortgage market - Posted by Ben Carmona

Posted by Ben Carmona on August 05, 2007 at 14:37:30:


Thank you for your thoughts.

One quick first recommendation for this topic. To keep this in perspective for readers, let’s please not use the term “subprime”. Subprime refers to those that are credit challenged borrowers. Many mortgage brokers willingly put their clients into loans such as these knowing that there was a high chance a refinance of their 2 or 3 year ARM would not be possible. Since the subprime market already had it’s crash several months back I want to differentiate this sector of the market called Alt-A which was generally for those with prime credit but falling outside of the normal Fannie/Freddie requirements of income/assets, # of properties, program types…etc.

You mentioned that Alt-A came about because of this financial crisis. I have to respectfully disagree on this but please tell me why you think this. Was there a financial crisis going on in 2003-2004? Alt-A has been around for awhile but recently over the last few years has taken on considerable consideration my many brokers because of the flexibility. Viewers may find the study listed here interesting. Pay particular attention to the warning within the 2nd to last paragraph as well the 1st lender listed within those who funded the study. WOW!

In 2003 (my 2nd full year), after seeing the direction of where the mortgage industry was headed with subprime, I chose to pass on future transactions of this nature. In the ensuing year I focused on networking with financial planners, cpas, and insurance agents. This was challenging and I mentally prepared myself that it was going to be a long road to building my business this way. Although solid in nature and important, it still takes awhile to build relationships in this industry. In 2004 I realized one of my key strengths was product knowledge. Like you building your business with turn downs, I saw an opportunity in working with investors who were either being turn down or running into major processing/underwriting problems with their existing mortgage originators. My research concluded that most brokers didn’t have a clue on how to consult a client/prospect on loan programs for investment properties; neither did they know how to get these through closing smoothly. I only bring up some of my past mortgage history as it seemed you were curious.

You are probably accurate that many brokers became complacent with the type of services they were offering. I myself am guilty on this. Trenching myself within the investor community I shifted focus on the products I offered. Initially, most of my investor client base didnâ??t have 15-20% down so the Alt-A loans were a perfect fit. As time elapsed more and more borrowers, the majority with above average credit scores, approached me for loans that fell outside of the conforming market. Of course when you’re successful at something you tend to focus on what’s going well which took me deeper within assisting the investor niche using Alt-A products.

My thoughts are that many mortgage brokers who recently came into this business within the last 3-5 years may not have realized these products were new by industry standards. Therefore, no reason to suspect that they would end so abruptly. Keep in mind that there’s been a lack of education in the mortgage market. Thousands of originators jumped into this industry with employers who spent no time training there employees on how the mortgage market ties into housing and economy. So unless the originator had a thirst for knowledge or was mentored, they were really out there on their own with no clue. Although I feel like I’m grounded in that and have 20/20 vision, I also feel like I’m “the man with his pants down” you mentioned. I really didnâ??t expect Wall Street to completely strip this away within 1 day. We’re not just talking myself and other brokers here. It goes much broader when you consider the scope of all those who are going to be affected. Almost every conforming lender offered 1 or more Alt-A product line. So this means within the lending institutions CEOs, account executives, underwriters, closing staff, and managers, didn’t see this coming otherwise we would have seen a scale back months ago.

Many of the other seasoned professionals who I’ve been communicating with over the past several days have said this is going to far surpass anything that happened in the 80s and 90s. I dont think we’ll be at an era of 20/20 terms but the ramifications coming to correct the market will be historic.

I’m interested in the fact that we’re going to see some changes that will eventually stabilize the housing market and also correct how originators abused short term arms, option arms, and reduced doc loans amongst others. You expressed being glad and I wanted to say I share your thoughts on the long term outcome this will have. The short term affect will be layoffs, businesses closing, borrowers losing loans that were in underwriting (even if approved), real estate agents losing commissions, builders getting stuck with inventory, and once again a further decline in the real estate market as we seen after the subprime market several months back like you mentioned.

You mentioned that borrowers sometimes claim to be victims. Although probably true with a percentage of true subprime loans, I agree that this next wave of defaults will require borrowers to hold themselves accountable; especially for investors who made bad speculations.

Great ideas are my specialty! You really should consider a broker workshop. Anything you can do to better someone elseâ??s career and life has merit. Let me know if you ever do; I’m a sponge when it comes to learning or adapting.

By the way, any tips or ideas for marketing and originating VA loans? Our office started working on integrating these into our business plan earlier this year.

My prayers are with everyone who’ll be going through some shaky times coming up. Dont panic, there will be a way to restructure. Know that that there is a God and that he is there for those who love Him. Romans 8:28.

Ben Carmona

Re: Deterioration of the Alt-A mortgage market - Posted by Ben Carmona

Posted by Ben Carmona on August 07, 2007 at 09:44:35:

Kind of hard to say what will be available. Lenders are just now starting to figure that out themselves. Would expect by end of week we should know.

Your scenario is not something that would fit within my expertise. Most of the programs I’m familiar with require a 660 fico.

I would say that lenders are probably headed back to more conventional financing. However, there should be lenders that step in to fill in some of the gaps.

Ben Carmona

Thanks Ben,… - Posted by acw

Posted by acw on August 12, 2007 at 07:23:10:

Thanks Ben…

Re: Deterioration of the Alt-A mortgage market - Posted by Rob Ricker

Posted by Rob Ricker on August 06, 2007 at 20:59:49:

Hey Ben …thanks for the scripture. That’s a great reminder of what our priorities should be …straight from God’s word.

By the way, you may or may not know, but Countrywide wholesale still has their Alt-A products. They have raised rates a little bit, but it’s not terrible. They say that they will not be hit as hard as their competitors on the Alt-A side, but I guess time will tell on that. They are still doing 95% stated loans (fast & easy) and No Doc up to 90% …but once again rates (actually points) have went up and they are requiring two appraisals for No Doc. Only thing they’ve really eliminated are the high LTV piggy backs. I haven’t checked on all the investor products yet, but O/O is still going strong for them as of today.