Some Alt-A Home Loans Go the Way of Subprime

It seems that we just can’t escape the bad financial news.  Now, mortgage loans made to supposedly better-off Americans are also heading south at an alarming rate.  This time around, the loans in question are Alternative-A (Alt-A) mortgages,which are used by borrowers such as the self-employed who have reasonable credit standings but unpredictable incomes.

Right now, the number of Alt-A loans with payments 60 days in arrears has quadrupled to 13 percent, compared with last year.  Because of the same slapdash underwriting standards that gave us the subprime mess, losses on Alt-A loans could eventually total $1 trillion.  According to the Bank for International Settlements, 40 percent of mortgages originated during the first quarter of 2007 were interest-only or negative-amortization Alt-A loans.

Some of these loans were granted, rather imprudently, based on minimal documentation of income and assets – sort of like the dreaded NINA loans. Alt-A borrowers pay higher interest rates than prime borrowers.  Many have option adjustable-rate mortgages (ARM) where they can chose one of four types of payments to make each month.  The amount can range from the actual principal and interest due or it could be a minimum payment, often significantly less than the interest owed.  When the ARM resets the interest rate, an $800 per month payment could easily soar to $1,500.  And that’s the point at which the trouble typically begins.