Subprime Defaults Exceed 25%

The default rate on securitized subprime loans hit 25.2% in December 2007, up 185 bp from that of the previous month, but defaults on alternative-A loans are also surging, according to a recent reports. 

Alt-A loans were loans where the customers primarily had acceptable credit, but needed "ALTernative" options to finance a home. No documentation of income type loans were extremely high on the list of alternative loan products, as were 80/20 100% combination loans. These borrowers are generally self-employed and highly leveraged.

Defaults on alt-A mortgages jumped to 8.26% in January 2008, up 106 basis points from the level in December and 250 bps from that of November. There are 2.8 million securitized alt-A loans totaling $839 billion, and nearly 20% of the loans are secured by second homes and investment properties.

The alt-A world is vulnerable in today's market with falling house prices and deteriorating labor market conditions. It is really a double-whammy for alt-A. The default rate includes loans 90 days or more past due, in foreclosure, and real estate owned.

Copyright 2008, Joe Metzler, http://www.joemetzler.com. All Rights Reserved.