Alt-A - Revaluation of Risk

Revaluation of Risk

During the subprime mortgage crisis that began in 2007, Alt-A mortgages came under particular scrutiny.

One problem associated with Alt-A loans is the lack of necessary proof or documentation needed to be approved for a loan. Thus, lenders may be inclined to suggest borrowers skew their incomes or assets in order to qualify for a larger loan; in the long run, the borrowers may turn out to be unable to afford their payments but the lenders still collect a hefty profit. Because Alt-A loans are also the financing of choice for most non-owner occupied, investment properties, as a class they represent a far greater likelihood of borrower default than conventional, conforming mortgages, since people are more likely to abandon a property in which they do not live than they are to risk losing their primary homes. As of 2008, there was strong evidence of weakness among securities backed by Alt-A mortgages for reasons similar to the crisis in those backed by subprime.

Because Alt-A loans were not primarily purchased by the GSEs, they thus became more expensive and much harder to find as a result of the general crisis in markets for mortgage-backed securities. Alt-A loans were still available from individual institutions which held them "in portfolio" rather than re-selling them to investors, and as of mid-2008 there was a strong push for the FNMA and FHLMC to be permitted to buy more of them. However, the interest rates in this lending category increased substantially between 2006 and 2008 as a result of the shrinking secondary market.