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Another Blow to Battered Alt-A Market

Fannie to stop buying Alt-A mortgages

August 11, 2008

By MortgageDaily.com staff

Fannie Mae, which owns or guarantees more than $300 billion in Alt-A mortgages, said such loans are responsible for a disproportionate share of its losses -- leading to its decision to halt further Alt-A purchases. The move by Fannie is just another nail in the coffin of limited-documentation programs.

In its second-quarter earnings report Friday, the Washington, D.C.-based firm explained that more than 60 percent of its losses resulted from just a small number of products, "especially Alt-A loans."

Fannie said it took $507 million in other-than-temporary impairments on private-label securities backed by Alt-A and subprime mortgages. The charges reflected a reduction in expected cash flows.

"Loan loss severity has increased, with our average initial charge-off severity rate increasing from 19 percent in the first quarter of 2008 to 23 percent in the second quarter of 2008, driven primarily by losses on our Alt-A loans in markets most affected by the steep home price declines," the report said. "As of June 30, 2008, our Alt-A mortgage loans represented approximately 11 percent of our total mortgage book of business and 50 percent of our second quarter credit losses."

Fannie's book of business was $3.040 trillion on June 30, suggesting that Alt-A loans it owned or guaranteed were around $334 billion at the end of June.

The secondary lender noted that delinquency was especially pronounced on Alt-A loans with layered risk, such as loans with interest-only payments and subordinate financing.

Underwriting changes it has already made to mitigate risk characteristics that drove those losses have reduced Alt-A volume by more than 80 percent from peak levels.

But Friday's report indicated that it would eliminate new Alt-A acquisitions altogether by the end of this year.

Poor performance of Alt-A loans backing mortgage-backed securities has led to massive downgrades of the securities, most recently by Fitch Ratings and Moody's Investors Service.

Chase advised its loan correspondents in June that it eliminated a host of Alt-A programs, while a number of companies that specialized in Alt-A business, such as American Home Mortgage Investment Corp., have gone belly up as the secondary market for those loans disappeared.

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