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Home > Cases > ABS & CDO Investment Losses > Subprime Woes Hit Alt-A Mortgage-Backed Securities

Subprime Woes Hit Alt-A Mortgage-Backed Securities

There subprime mortgage crisis has spread to yet another segment of the credit market: Alt-A residential mortgages.

Between subprime mortgages and prime mortgages, there is a middle ground category of loans. These are Alt-A loans. Alt-A loans don't require the standard income verification process, so some Alt-A borrowers exaggerate their pay in order to purchase a home that they really can't afford. For this reason, Alt-A mortgages are sometimes referred to as “liar loans.” The Alt-A market is highly diverse and includes fixed interest rate loans, as well as 'option' ARMs that have lower minimum payments.

While many Alt-A mortgages were issued to subprime borrowers, individuals who had better credit took advantage of them, too. Because valuations for securities backing these mortgages have fallen sharply, certain investment funds are being forced to unwind or meet margin calls.

London-based Peloton Partners LLP is doing just that. The fund, which owns both subprime and “safer” Alt-A mortgage debt, is in the process of liquidating a $1.8 billion hedge fund. Trouble could be ahead for UBS and Merrill Lynch, as well, since both hold many Alt-A mortgages.

The problems for Alt-A securities may have started Feb. 14, 2008, when UBS revealed for the first time the full extent of its Alt-A holdings. Speculation quickly ensued that the firm would soon sell a large amount. A JP Morgan Chase report dated Feb. 22 stated that securities rated AAA and backed by 30-year fixed rate Alt-A loans in excess of $417,000 fell to 12 cents less per dollar of principal than similar securities guaranteed by Fannie Mae or other government-related entities. That's more than twice the loss of 5.5 cents for the securities a few weeks prior.

The decline of Alt-A mortgage-backed securities is especially worrisome in that approximately $950 billion of Alt-A mortgage securities are currently outstanding. This compares to about $650 billion of outstanding subprime securities. UBS, which owned more than $21 billion of top-rated Alt-A securities on Dec. 31, 2007, marked them down by $800 million. Merrill Lynch owns $2.7 billion of Alt-A debt, primarily securities.

As losses on Alt-A home loans continue to escalate, investors should take heed and begin to question just how safe their money is in mutual funds and other investments backed by Alt-A mortgages. In reality, the volatility of the Alt-A market could place individual and institutional investors alike at far greater risk of losing money than they realize.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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