Alt-A Mortgage Statistics

• $400 billion worth of Alt-A mortgages were packaged into bonds in 2006
• 10 percent of the Alt-A loans packed in 2006 shared subprime characteristics
• $200 billion of the $700 billion in curret outstanding Alt-A mortgages are backed by option ARM bonds
• Alt-A loans account for 25 to 50 percent of Moody's recently increased loss projections

Source: Moody's

Alt-A mortgages are a step above risky subprime loans, and a step below the prime loans given to borrowers with the best credit. Such loans are typically given to people who are seeking to finance investment properties and to people who want to qualify for a loan without having to prove their income. Alt-A loans have been given the nickname 'liars loans' because many borrows lie on their application in order to qualify. Analysts at Credit Suisse Group estimate that 60 percent of liar loan applicants exaggerate their income.

The Downfall of the Alt-A Sector

Michael Youngblood, a top mortgage-bond analyst with Friedman Billings Ramsey Group Inc., recently wrote in a report that 'liberal underwriting was not limited to subprime loans', and for this reason alone, default rates for non-subprime mortgages will increase significantly in 2008.

Youngblood singled out Alt-A mortgage loans and jumbo mortgage loans in particular and said he expected defaults and foreclosures to rise considerably in 2007 and 2008.

Defaults, in fact, have already begun to increase in the Alt-A mortgage sector. Lenders are feeling the pressure, and several have been bankrupted as a result. American Home Mortgage Investment Corp., a lender who deals in Alt-A mortgage loans, was forced to file for bankruptcy protection just last week after they were unable to deliver more than $800 million for mortgage loans that had already been promised to buyers.

Investors have also recently become very reluctant to buy bundled Alt-A mortgages and many lenders are recognizing the fact and beginning to pull out of that sector. The largest of Alt-A lenders, Wells Fargo, released a statement earlier this week saying they would be curtailing exposure to Alt-A loans.

This new policy is bound to limit the amount of money available to potential home buyers, and will most certainly affect real estate sales in the coming months. Current homeowners who are looking to refinance may also have difficulty.

Such factors are sure to accelerate the decline in home values, which are already projected to be significant. If this were to happen, it would be financially devastating to millions of people. On the other hand, the correction is needed for the long-term health of the market, as too many people were 'priced out' during the boom.

In any regard, we are most likely seeing only the tip of the iceberg.