Rewriting the Rules for Sub-prime Mortgages
Thursday, March 01, 2007PAUL KANGAS: U.S. banking regulators are getting ready to roll out new guidelines for the sub-prime mortgage market. That market has been in big trouble in recent months as more and more Americans with shaky credit default on their loans. But as Stephanie Dhue reports, there is growing concern that it's not just sub-prime loans that are a problem.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: New figures show 27 sub-prime mortgage lenders have collapsed in recent months. Many of the sub-prime lenders that are hanging on have moved up market into less risky loans. ISI analyst Andy Laperriere says the mortgage problems aren't limited to the sub-prime market.
ANDY LAPERRIERE, ANALYST, ISI GROUP: The problem is that the same mentality and the same kind of bubble atmosphere that led to some imprudent loans being made in the sub-prime market, they were also made to people with good credit scores.
DHUE: These types of loans, known as alt-A loans, fall into a grey area between sub-prime and prime loans. Borrowers' credit scores are higher, but the loans have many of the same risky characteristics found in sub-prime loans. For example, many were interest-only, adjustable-rate loans with short-term teaser rates. Borrowers put little or nothing down, had high debt to income ratios and the loans required little or no documentation.
LAPERRIERE: Eighty percent of the alt-A loans last year were low-doc or no-doc loans or liar loans, where the bank didn't verify the income and I think that's an example of the kind of practice which was pretty rare in the past and has become commonplace in the last few years.
DHUE: Companies like Indymac, Bankunited and Countrywide, which have a significant a share of alt-A loans, could suffer. But Mortgage Bankers Association chief economist Doug Duncan says alt-A lenders should fare better than sub-primes.
DOUGLAS DUNCAN, CHIEF ECONOMIST, MORTGAGE BANKERS ASSOCIATION: You'll probably see some rises in delinquencies, because that is in the middle of the prime and sub-prime space, but it's probably pretty well-anticipated by their investors or by investors who bought that product from them.
DHUE: Standard & Poor's debt analyst Martin Kennedy doesn't expect there will be a widespread problem with alt-A mortgage backed securities.
MARTIN KENNEDY, DIRECTOR RESIDENTIAL MORTGAGE GROUP, STANDARD & POOR'S: You have additional risk in alt-A in 2006 that you did not have in 2005, but the credit protection that has been built into the deals is enough to withstand that risk.
DHUE: Analysts say since borrowers with alt-A loans have higher credit scores, it should be easier for them to refinance into less risky products. But if lenders continue to tighten credit standards, that may no longer be an option. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
