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A big announcement by Moody’s today effectively killed Alt-A lending as we know it and has triggered a liquidity crisis as the downgrades in Alt-A backed securities face a slew of margin calls. From the Housing Wire’s excellent report on the issue:
 These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
Weak Alt-A pools are seeing a huge jump in risk which demolishes pricing on these securities. When pricing tanks margin calls begin to flood in to meet the requirements of the margin agreements. Those margin calls have to be met.
Now think of all of the Alt-A lenders who have been using the “strength” of Alt-A in order to borrow more money to buy up more debt. They are now seeing that strength being sapped and have to come up with millions of dollars to meet their agreements. This sucks up cash that is usually used to fund loans, operations, etc. So the companies get stuck with out any working capital; and it doesn’t take a genius to figure out what happens to a company with out capital.Although the DOW rallied today look for an ugly start tomorrow; especially on Alt-A powerhouses like IndyMac and others. Anyone who made a living in the Alt-A, Jumbo, Option ARM worlds will be hurting for cash in the morning.
As Barry Habib, Founder of the Mortgage Market Guide (a subscriber-based industry resource) said “We’re going through history; and we have a front row seat.”
