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Trouble Ahead For Alt-A Mortgages? - Investor Insight - Subprime Losses
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Home > Blog > Trouble Ahead For Alt-A Mortgages?

Trouble Ahead For Alt-A Mortgages?

Analysts say the subprime mortgage crisis is now spreading to another segment of the credit market: Alt-A residential mortgages.Â

Alt-A mortgages are the middle ground of loans between subprime mortgages and prime mortgages. Because Alt-A mortgages don’t require the standard income verification process, some Alt-A borrowers may exaggerate their income to buy a home they can’t afford. For that reason, Alt-A mortgages are often coined as “liar loans.”Â

Many Alt-A mortgages were issued to subprime borrowers, but individuals with better credit also have taken advantage of them. In recent months, valuations for securities backing Alt-A mortgages have fallen sharply, causing certain investment funds to unwind or meet margin calls.

Case in point: London-based Peloton Partners LLP. The fund owns both subprime and “safer” Alt-A mortgage debt, and is in the process of liquidating a $1.8 billion hedge fund. UBS and Merrill Lynch also may be looking trouble in the future, since both hold Alt-A mortgages.

Problems for Alt-A securities might be traced back to Feb. 14, 2008. UBS revealed for the first time its full exposure to Alt-A holdings. Speculation then took hold that the firm would be selling a large amount. A Feb. 22 JP Morgan Chase report said 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.Â

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

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.Â

This entry was posted on Monday, March 3rd, 2008 at 2:28 pmand is filed under ABS & CDOs, Merrill Lynch, Peloton Partners, UBS. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

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