Last week was an eye-opener for the mortgage industry.  Brokers will be talking about it for years to come.  In March 2007, we witnessed the Subprime Mortgage Meltdown where bad credit behemoth lenders the likes of Fremont and New Century fell with a thunderous bang - never to rise again.  Oh, those bad credit lenders, what were they thinking?  That subprime demise was no surprise, man - those people had bad credit, right?  Wrong, it caught many off guard at the time.  And now, five months later, it's Alt-A's turn.  Just in case you're wondering, the Alt-A folks have a history of good credit.  Last week they were judged.  Sadly, they didn't pass the test.

OK, ok, we all know, foreclosures are on the rise.  No one wants the doom and gloom speech so spare us, please.  Don't worry, I always turn it into a positive, but we need to be realistic about where we are and what is available to us to move this thing in the right direction.  The fact is that a large portion of loan programs will be taken off the shelf over the next few weeks.  We need to understand that first.  So let's talk about Alt-A and the ramifications of our recent mortgage-backed-security-earthquake.

‘Alt-A' is alternative-documentation mortgage loans.  The ‘A' presumably is the credit grade.  I say presumably because there isn't necessarily a set standard for Alt-A.  They represent a subset of mortgage loans that are not ‘conforming' or ‘agency' loans.  The conforming loans conform to the guidelines established by FNMA, FHLMC, and GNMA.  FNMA and FHLMC are quasi-governmental agencies that function as a secondary market for residential mortgage loans.  GNMA operates in a similar way but is a government-owned corporation.  There is no problem with liquidity [the ability for a mortgage originator to turn a funded mortgage loan back into cash - to sell it in the secondary market] with conforming loans.  The problem is, at the moment, there is no secondary market for Alt-A loans.  No one wants to buy them.  So, who used to buy them?

The hedge funds were the buyers.  A hedge fund is a group of 100 or fewer investors with high minimum investments of around $1M each.  Hedge funds are exempt from many of the rules and regulations governing mutual funds because the hedge fund investors are wealthy individuals or institutions and as a result, they take on risky investments.  The liquidity party began to unravel a few weeks ago with the collapse of two Bear Stearns hedge funds.  Since then, other hedge funds have failed.  The problem is that when the hedge funds fail, they have to sell the underlying assets of these funds and the assets are then ‘marked-to-market' as we now know their true value; Wall Street's version of a foreclosure.  The fact is, the underlying assets are not valuable; there is no appetite for them, and as a result, Alt-A mortgage loans presently can't be sold on the secondary market.  That's the situation we're in today.  Many lenders are no longer offering Alt-A programs.  Big players like Wells Fargo and Wachovia come to mind.  This is a developing story and next week should make for an interesting week.

So, to sum it all up my real estate friends [if you don't already know] I say learn the term ‘agency'.  FNMA, FHLMC, FHA, VA are here to stay.  Learn their guidelines.  Many programs were taken off the shelf last week and there will be more changes to come amongst various financial institutions this month.  Some lenders still offer Alt-A loans, but the pricing has worsened and the qualifying criteria is much more difficult.  Other lenders stopped offering them altogether.  As I type all of this and having witnessed last week's mortgage-backed-security-nuclear-war, I think to myself: "so many changes, so many players, so much confusion".  I'm comforted knowing my place in life is to bring order and peace amidst seemingly financial chaos. 

What do I do?  Me?  I'm a mortgage broker.