What is an Alt-A Loan?
Alt-A loans, or Alternative-A loans, are mortgages that have a risk profile greater than prime mortgages (or A paper) but less than subprime. During the speculative housing boom of late 90s and early 2000s, Alt-A loans were given out readily to higher risk borrowers. The following article will further explain the various features of Alt-A mortgages, who they are given to, and the problems that they sometimes can cause.
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Who uses Alt-A mortgages?
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Alt-A mortgages are not necessarily for people with poor credit. A person may have fine credit but fail to meet certain standards to secure a prime loan from one of the government sponsored agencies, like Fannie Mae or Freddie Mac. The borrower may not have the necessary debt-to-income ratio for a prime loan, or may be asking to borrow too high of a percentage of the home's value to qualify for a prime loan.
Income Verification
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A key feature of Alt-A loans is that many times they are given to people who are unable or unwilling to verify their income or assets. Because lenders often do not ask for this type of verification, potential borrowers often lie about their income and assets in order to secure the loan. For this reason Alt-A mortgages are sometimes given the nickname "NINA" loans: No Income, No Assets. The lack of proper documentation has meant that many unqualified borrowers received loans that they should not have.
Lender's Role
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As the housing bubble began to unwind, the Alt-A mortgage market and the subprime market were revealed to have some questionable, if not illegal, lending practices. Lenders often encouraged borrowers to lie about their income in order to secure a larger loan. Even as the borrower eventually becomes unable to make the mortgage payments, the lender still receives a large premium. In many cases individuals working at mortgage companies would receive a commission based on the size of the loan that they were able to extend.
Role of Speculators
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Alt-A mortgages were often used to purchase non-owner-occupied homes. That is to say, housing speculators would secure the loan in order to purchase multiple houses and then sell them for what they thought would be a higher price in the future. However, when housing prices began to drop, the speculator was stuck with homes whose assessed value was less than the value of the mortgage itself. As a result, he would simply stop making the mortgage payments and the bank would assume ownership of the houses.
Credit Score
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Although Alt-A mortgages can be given to people with perfect credit scores for the reasons mentioned above, often they are given to people whose credit is flawed, but not so bad that they deserve a subprime loan. Generally speaking, people who receive Alt-A mortgages have a credit score no lower than 620. Because of the risk posed by using these types of loans, it is important to mention that they do carry with them a higher interest rate.
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