Alt-A … TIMBER!

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Where are all of those experts who said the subprime problem was contained, and that it would not spill over to the Alt-A and Prime markets? Where are they as Alt-A lender after Alt-A lender goes belly up or suffers huge profit losses?

The OC Register covers the Alt-A contagion of delinquency and default nicely in an article from this weekend. Matt Padilla, who writes the Mortgage Insider blog there, covers the recent fates of IndyMac, Impac and Downey Savings, locally based lenders who specialize in Alt-A mortgage products.

Photo credit: Sacramento Bee

Some of the highlights:

Last year, 20 percent of home purchase loans were Alt-A, up from 5 percent in 2002, according to a March 12 report by Credit Suisse.

The report said lenders took too many risks with Alt-A loans last year. For example:

On average they loaned 88 percent of the value of a home, with 55 percent of homebuyers taking out a simultaneous second mortgage, suggesting such borrowers didn’t pay mortgage insurance and borrowed the full value of the home.

Low or no documentation loans represented 81 percent of all Alt-A purchase loans in 2006, up from 64 percent in 2004.

Loans with a one-year fixed "teaser" rate accounted for 28 percent of Alt-A purchase loans last year, "setting the stage for considerable reset risk" when the teaser period ends.

And, by the way, none of these banks are saving enough money to deal with loan losses.

I am pretty much done beating this dead horse. As I have said more times than I care to remember, the issue is not FICO score. The issue is capacity. The capacity of the borrower to repay the loan. FICO’s do not make your mortgage payment. The credit distinction is a red herring, and those people who are in highly leveraged positions in all credit bands, subprime, Alt-A, and prime will be impacted. Delinquencies and defaults will rise in all buckets.