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IMH, CFC: Subprime mortgage woes may be spreading Losses are creeping up on so-called Alt-A home loans

http://www.marketwatch.com/news/story/subprime-mortgage-problems-may-spread/story.aspx?guid=%7B664D1....

Subprime mortgage woes may be spreading
Losses are creeping up on so-called Alt-A home loans
PrintE-mailDisable live quotesRSSDigg itDel.icio.usBy Alistair Barr, MarketWatch
Last Update: 2:52 PM ET Mar 11, 2007

SAN FRANCISCO (MarketWatch) -- Problems in the subprime mortgage business may be spreading to other parts of the home loan market.
Losses are creeping up on so-called Alt-A loans, which are considered less risky than subprime mortgages, but may have lower credit quality than "prime" loans.
That's sparked concern among investors in companies such as IndyMac Bancorp (NDE : IndyMac Bancorp Inc
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12:07am 03/12/2007

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12:05am 03/12/2007

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12:06am 03/12/2007

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Subprime mortgages are offered to lower-income borrowers with spotty credit records. The sector has descended into crisis recently as rising interest rates and stagnant home prices have left more borrowers struggling to meet monthly payments.
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 mortgage investors 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, creating what Mark Adelson, head of structured finance research at Nomura Securities International, calls "Alt-B" products.
"The Alt-A market has absorbed and disguised a portion of the subprime space," he said. "You can debate how to define these loans, but many have ended up being an Alt-A product with subprime deficiencies."
Surging house prices earlier this decade are partly to blame, Adelson said.
When buyers realized they couldn't afford the home they wanted, they took out alternative mortgages that helped them pay the higher price. Alt-A mortgages requiring few documents - often called stated-income loans -- allowed buyers to inflate their earnings and get a bigger loan, he explained.
"In the past few years, Alt-A loans were made to weaker and weaker borrowers and the sector expanded downward along credit spectrum," he said. "In doing that, you draw up into the Alt-A space some of the problems that are affecting the subprime space."
Indeed, losses on Alt-A loans were already creeping up at the end of last year: 2.38% of Alt-A loans were at least 60-day delinquent in December, according to First American LoanPerformance, a unit of real estate data specialist First American (FAF : First American Corporation
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Data on Alt-A mortgages that have been packaged up and sold as mortgage-backed securities show the growing popularity of low-documentation and stated-income loans.
More than 80% of Alt-A mortgages that were securitized in 2006 were low-documentation, stated-income loans, according to Inside Mortgage Finance. That's up from 68% in 2005.
Data from LoanPerformance tell a similar story: 58% of all mortgages originated in the fourth quarter of 2006 were low-documentation loans. That was up from 21% at the start of 2000.
In California, which has seen some of the biggest gains in home prices this decade, 86% of all mortgages offered in the fourth quarter were low-documentation loans. That's up from 29% in early 2000, LoanPerformance data show.
Stocks hit
Concerns like these have hit the shares of Alt-A specialists.
IndyMac, the largest Alt-A mortgage lender, has slumped 32% so far this year. Impac, a smaller rival, is down almost 40%.
Michael Perry, chief executive of IndyMac, said earlier this month that the company's stricter underwriting standards have helped it avoid the heavy losses experienced in the subprime sector.
Still, he said he was disappointment with the outlook for 2007 and noted that IndyMac would keep costs under control to compensate.
Countrywide Financial shares have fallen 14% this year. About 15% of the company's mortgage origination in 2006 was Alt-A loans, lower than some rivals, according to Inside Mortgage Finance.
More than three quarters of the loans IndyMac originated last year were Alt-A mortgages. Over 90% of Impac's loans were Alt-A in 2006, Inside Mortgage Finance reported recently.
Even General Motors, the largest carmaker in the world, has been hit by Alt-A concerns. The company's mortgage finance business, Residential Capital Group, was the third-largest Alt-A originator in 2006. Almost half of all the mortgages the business originated last year were Alt-A loans, according to Inside Mortgage Finance.
GM Chief Executive Rick Wagoner admitted at the Geneva auto show on Wednesday that loans to high-risk customers have hurt the automaker's former financing unit, according to the Wall Street Journal.
GM shares are up more than 5% so far this year. However, the stock has dropped more than 15% since the middle of February.
Alistair Barr is a reporter for MarketWatch in San Francisco