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Alt-A Lending Lacks Uniformity

Fitch cites 3 subsectors of Alt-A loans

October 13, 2004

By MortgageDaily.com staff

Alt-A mortgage loans may be nonconforming, but one new study says there is no conformity between Alt-A lenders. The report's author, however, has broken such alternative loans into three sub-sectors.

Fitch Ratings announced it has determined material differences exist among Alt-A residential mortgage-backed securities due to a lack of uniform standards. This vacuum has led to real differences in Alt-A originations, leaving many Alt -A securitizations to bear "unprotected credit risks because of the implications from borrower credit, risk layering and intangibles."

The booming Alt-A market, which was created to offer alternative processes for borrowers who cannot comply with conforming or nonconforming program guidelines, has evolved as new entrants and existing lenders have expanded their product bases, the ratings agency explained.

"As lenders have embraced a wider credit spectrum under the Alt-A banner, there is such a blurring of the original definition of Alt-A, that the term should hold little meaning to investors," the report's co-author Cheryl Glory said in the announcement. "The Alt-A sector should no longer be described under one definition."

Fitch's new study, titled Who Put the Alt in Alt-A?, stems from concern over developments in the Alt-A market. The analysis studied over 71,000 Alt-A loans that collateralized bonds issued by GMAC-RFC and IndyMac Mortgage Corp. from 1999 to 2000 through the RALI and RAST securitization platforms, respectively, which have an interest rate environment commensurate with current interest rate expectations.

Fitch's quantitative support segments the alternative market into three sub sectors: Prime Alt-A, Alt-A- and Alt-B. Each of these sub-sectors will have distinctive delinquency, loss and prepayment expectations, the announcement said.

Because "issuers' underwriting and credit standards have a great impact on pool performance," Fitch analyzed IndyMac's and GMAC-RFC's intangible risks and found "substantial" performance variation between their securitizations even when loan attributes and borrower credit were controlled. Examples of intangibles include FICO sourcing, risk offsets based on credit, valuation procedures, exception policies, multiple risk layering and LTV offsets.

It was also found occupancy type determines Alt-A performance -- with nonowner occupied properties representing greater risk. Fitch said these type of properties "as the most common recurrence of cohorts with bad rates at a time when home price growth was very strong, raises concern that these loans will likely deteriorate further as home appreciation slows."

The research, Fitch said, shows current Alt-A- and Alt-B pools have riskier loan characteristics than Prime Alt-A , "and combined with expanded origination guidelines and weaker underwriting practices can create substantial credit risk."

'"As we see from this research, default risk is magnified in certain collateral pools given less rigorous origination practices and multiple risk layers," Fitch's group managing director John Bonfiglio said in a written statement. "While the credit support provided to investors in Alt-A- and Alt-B deals is greater than those of Prime Alt-A, Fitch generally feels it is insufficient to compensate for the increased risks investors face."

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