Deterioration of the Alt-A mortgage market

[Ben Carmona]

Over the last several months we seen the collapse of the subprime market which funded loans to those who were credit challenged. More than 2 dozen companies shut their doors while others scrambled to change guidelines which reflected the direction of the upcoming market.

In addition to these changes we've seen several states putting in their own legislature to stop reduced doc loans like stated, no ratio, and no doc.

Now the biggest impact has started Thursday, 8/1/2007 that will affect the Alt-A (portfolio) products.

Just a quick breakdown of what Alt-A is.
Lenders sell of their loans in bulk on the secondary market. Normal conforming loans are usually sold of to Fannie/Freddie. The Alt-A loans are purchased by investors on Wall Street because at one time they perceived the risk was worth the yield return.

Alt-A loans were generally made to those with good credit but in need of reduced documentation, high ltv, unlimited properties, or other factors that fell outside of the conforming nature. THIS INCLUDES THE FOREIGN NATIONAL PRODUCTS.

With the current and expected increase in default, the Wall Street investors are no longer interested in purchasing these types of loans from lenders. In fact, some of the investors are now making margin calls to these lenders which could be disastrous.

This week we've already had 1 major lender shut their doors and it can be assumed there will be a domino affect.

As of yesterday and early today, almost every lender that once offered an Alt-A loan has either changed the product guidelines completely, pulled their products altogether, or have priced their product incredibly high.

What this means to you as a borrower.

Uncertainty for the next few days to weeks. You should absolutely call your mortgage professional if you are in the middle of a transaction, especially if preapproved. Those prepprovals are potentially invalid now. All loans need to be locked ASAP so they can be grandfathered in with the old guidelines.

Because this just happened, many lenders are still reacting and just making changes. I've spent the morning speaking with my contacts within the lenders I use and all have told me that changes to their Alt-A market are coming. Some have advised that their products will be completely pulled.

It appears that the majority of lenders are now looking to originate pure conforming loans which they know can be sold off. My thoughts are that the market is correcting itself and we’ll see this continue for a bit. There’ll probably be some remaining lenders offering Alt-A products but it’s tough to say who and what will be offered.

Check out www.ml-implode.com

Feel free to contact me with any questions you may have about the industry changes or a scenario you may be currently involved in.