Prime and Alt-A Mortgage Product Types

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In a recent post I looked at our company’s production information to try to shed some light on the potential risks facing prime and Alt-A mortgage markets and whether those risks would point to a spread of the subprime market meltdown to the prime markets. It is well agreed now that Alt-A is in trouble, but there is no concrete evidence that the prime market is in trouble.

Below are two graphs representing the product mix for two credit bands representing the prime and Alt-A borrowers for whom our company originated loans in 2006.

The biggest things to notice are:

1. For Prime borrowers a full 50% of the loans originated were either "exotic" mortgages (interest only or pay-option neg-am ARMs) or 2nd mortgages.

2. For Alt-A borrowers a full 40% of the loans originated were either "exotic or 2nd mortgages.

This was alarming to me. No matter how good someone’s credit is, there is a limit to how much exposure a family can handle in terms of payment shock related to mortgage recasts and rate adjustments. The question is – are these people in homes that they can’t afford because of their superb credit? While they should be able to refinance out of these product before the effects become too deleterious, the depressed home prices could limit their options due to loan-to-value issues.

The situation is worse for Alt-A borrowers who may no longer qualify for these exotic products with the industry’s return to tighter underwriting standards and the above-mentioned home depreciation.

While not conclusive by any means it does point to the assumption that the prime market is not the haven of safety its being painted as in the press and by experts. There is a lot of instability based on the product types chosen in recent years by prime and Alt-A borrowers.

Please note these figures represent one company’s data and are not intended to be representative of the entire mortgage market.