Residential mortgage securitizations have been flat or declined during the first half of this year. But Alt-A issuance, fueled by affordable mortgage demand, hit a record -- and is not expected to wane.
The volume of Alt-A residential mortgage-backed securities was up 33 percent from the first quarter to the second quarter, Standard & Poor's Ratings Services reported Wednesday. Securitizations were 50 percent higher than the same quarter a year earlier.
Demand for affordability mortgage product "explains why Alt-A growth has been strong, even as growth for many other RMBS segments is flat or down," according to the report, Trends In U.S. Residential Mortgage Products: Alt-A Sector Second-Quarter 2006. "The ability of affordability products to reduce the monthly payment burden of borrowers should continue to make them popular, as home buyers stretch to meet rising interest rates and high home prices."
Several investment banks as well as large "loan aggregators," including Merrill Lynch and Deutsche Bank, have acquired mortgage originators on the basis of building production facilities to compliment their existing securitization facilities, S&P said. Additional mergers are likely, although its not clear vertical alignments will be successful.
Foreign investor demand and new hybrid option ARMs -- which borrowers will begin to favor over interest only -- are also factors that drive the Alt-A asset backeds, the report indicated.
S&P said subprime players are now moving into the Alt-A market, "opening a whole new stream of competition." In addition, some originators have been relaxing their Alt-A underwriting guidelines.
During the second quarter, simultaneous seconds were reportedly closed with more than 60 percent of Alt-A loans. But the share with seconds is expected to decline for the rest of the year.
Among Alt-A issues dubbed "Hot Buttons" by S&P were prepayments as rates reset, delinquency on recently originated mortgages and early payment defaults.