Alt-A is going to get ugly

A friend of New York to Nicosia writes to us today...

...but seeing that American Home Mortgage halted trading reminded me of something. The loss severity (ie, the amount lost per bad loan) is going to be much higher in the Alt A market than it is/was in the sub-prime market. Two things: 1) the subprime market underwrites the property more than it does the borrower in many cases. In contrast, the Alt A market focuses more on the credit-worthiness of the borrower. This means that the values are likely to be more inflated in the Alt A space which flows through to lower recovery values. 2) the Alt A market by definition extends higher LTVs than the sub-prime world. A person with a 60-day late might be capped at 80% in sub-prime. In contrast, ALT A has a ton of 100% stated and no-doc loans.

Now the bad loan percentages might be higher in sub-prime but when a loan goes bad in alt a it really explodes.

Posted on July 30, 2007 and filed under Finance.