Last month's news that Moody's Investors Service was revising its analysis on residential mortgage-backed securities (RMBS) transactions involving Alt-A mortgages put the now-dormant sector back in the spotlight. This bit of bad news followed the release of a study from the Federal Reserve Bank of St. Louis that charted the rapid rise and equally meteoric fall of the Alt-A sector during the past decade.
Despite the problems connected to the sector, there are still people in the mortgage banking industry that believe Alt-A can make a comeback. They believe that a smaller and more focused market could easily take shape in the near future.
However, there are also those who wish they never heard of Alt-A – and they were not pleased to hear the Jan. 14 announcement that Moody's put $572.7 billion in Alt-A RMBS transactions from 2005 to 2007 on watch for a possible downgrade. Moody's stated that its projections, on average, foresaw cumulative losses of 14% of the original balance for the 2005 securitizations, 29% in cumulative losses for 2006 securitizations and 35% in losses for 2007 securitizations.
Furthermore, the rating agency reported that the number of Alt-A loans with delinquencies of 60 days or more ‘increased markedly’ since its prior revision of projected losses. Moody's predicted that the percentage of current or 30-day delinquent loans that will become delinquent by 60 days or more by the second half of this year will be 10.1% for the 2005 issuances, 19.7% for the 2006 vintage and 21.6% for the 2007 output.
The Moody's news served as a troubling postscript to a study by Rajdeep Sengupta, an economist with the St. Louis Fed. Sengupta's article, ‘Alt-A: The Forgotten Segment of the Mortgage Market’ was published in early January in Review, the St. Louis Fed's bimonthly journal. Sengupta's article saw the root of Alt-A's eventual downfall at the beginning of the last decade, when originations took on a new focus with adjustable-rate mortgages and cash-out refinances, while underwriting standards began to require less documentation and lower credit scores.
‘This market in the 1990s had very small numbers,’ explains Sengupta. ‘It consisted of private-label originators that mostly kept on their books.’
However, he adds that when the originators began taking these loans out of their portfolio and entering them into the secondary market, the product's popularity skyrocketed.
‘With securitization, Alt-A took off around the period of 2000 to 2002,’ he continues. ‘It really arrived in 2003 to 2005.’
Sengupta's research found that Alt-A originations increased 54% between 2001 and 2003, and then took an astonishing 340% jump between 2003 and 2006. While serious delinquencies began to turn up in the sector by 2006, Sengupta points out that it is unfair to lump Alt-A and subprime mortgages together as being the chief cause of the current crisis.
‘Alt-A failed, in part, the way almost all other products failed – home prices dropped,’ he explains. ‘The Alt-A product was a much better quality than the subprime product, and it performed better than subprime. There was nothing particularly specific to Alt-A that caused this particular market to go belly up.’
But does anyone have the stomach to re-approach this belly-up sector? Sengupta is skeptical about a second act.
‘At the moment, I doubt it,’ he says. ‘In the future, who knows? You could originate an Alt-A mortgage, but you would have to be very careful about what the model is and what underwriting to do on it. Whether lenders would be willing to take the risk remains to be seen.’
But within the industry, some believe Alt-A can find its way back into favor.
‘It is going to be quite a while,’ says Bill Bradway, managing director of Bradway Research, based in Boston. ‘We're talking three to five years. There is no appetite for the product now – who wants to own that loan?’
Bradway believes that a new Alt-A market will have a significant retro feel to it. ‘What we will see is a return to what existed in the 1970s to the mid-1990s, when origination of that kind of product came from independent home-loan shops that charged much higher interest rates,’ he adds. ‘That type of loan was not sellable, but financial institutions were willing to take on that risk.’
Scott Stern, CEO of Lenders One, based in St. Louis, sees a conditional return of the sector.
‘Alt-A loans should not involve the layering of risk,’ he warns. ‘Alt-A can exist with alternative underwriting guidelines, so servicers and investors can account for risk. If we have well-underwritten Alt-A loans that underline the risk factors, we will see that market recover.’
Howard Banker, executive director of Washington, D.C.-based Fair Mortgage Collaborative, feels the product deserves to overcome its reputation problems.
‘It is inevitable that Alt-A will come back,’ he says. ‘In our opinion, as long as mortgage pricing accurately reflects the credit risk that the borrower really represents, it is a fair mortgage.’
Thomas Pinkowish, president of Community Lending Associates in Essex, Conn., concurs, adding that a revived Alt-A market can also spark a return to another troubled sector.
‘Real Alt-A is the first step back to subprime,’ he says. ‘However, opening the door to subprime has to go through some congressional or political gate, since Fannie and Freddie are wards of the state. But if the government opens Alt-A again and it has the government seal of approval, we'll see a movement there in whether lenders feel they can afford it.’
Pinkowish feels that tomorrow's Alt-A market will serve a very specific origination niche. ‘It will be handled by smaller lenders,’ he says. ‘They'll have Alt-A, but it will be tuned more to community-oriented goals, like the original Community Reinvestment Act loans.’
(Please address all comments regarding this article to Phil Hall, editor of Secondary Marketing Executive, at firstname.lastname@example.org.)