The Alt-A Write-Downs Intensify...
February 14, 2008
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RELATED TICKERS: UBS
There already have been some Alt-A write downs, but it seems to me that the focus of the financial losses so far has been the subprime.
UBS "reveals" "new" US loan exposure, $26.6 billion of exposure to the Alt-A. They couldn't possibly have seen this coming and warned investors sooner... And they call these mortgages "less risky"
Here's a note about Alt-A from almost a year ago:
"When buyers realized they couldn't afford the home they wanted, they took out alternative mortgages that helped them pay the higher price. Alt-A mortgages requiring few documents - often called stated-income loans -- allowed buyers to inflate their earnings and get a bigger loan, he explained. "In the past few years, Alt-A loans were made to weaker and weaker borrowers and the sector expanded downward along credit spectrum," he said. "In doing that, you draw up into the Alt-A space some of the problems that are affecting the subprime space.""
And here's a report, written in 2006, on how they increased in 2005:
"Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren’t risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why? Partly, it seems, because more people chose option ARMs. Those, of course, are specialty ARMs that give you the option to pay even less than the monthly interest you owe. The unpaid interest gets added onto your principal (negative amortization). Option ARMs climbed from 17% to 23% of first-mortgage originations.
Then there are alt-A loans—the ones you get when you don’t submit all the documentation that would be required to qualify for a straight loan. Those are usually chosen by people who have unsteady sources of income—or simply have too little documented income to qualify for a straight loan for the house they want to buy. The MBA says alt-A loans’ share rose from 8% to 11%."
And right now in Southern California some home prices are back to January of 2005, or earlier... To put this into perspective, home prices went up an additional 22% ($80k) in the period that 1/4 of the mortgages written were already the alt-A mortgages, where you don't have to prove you can afford the mortgage. I have no idea what percent would also have been the subprime market. But, this suggests a great deal that bought at 3 and 4 year ago prices couldn't afford those prices.
This market has such a long ways to decline yet...
Yup, completely new, and it is going to be completely new as this stuff resets and works it was onto balance sheets for the next two year... No one can possibly know to expect more write downs and write-offs in banks over the next two years...
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