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The difference between Alt-A and subprime? Understand where they go after closing

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Mortgage and Lending with iBrandPlan.com - Grow your e-Profile & Brand

Mortgage Backed Securities PRIMER - to understand where the different 100% financing programs go...

A Mortgage Backed Security (MBS) is essentially a group of loans (often called a pool) that have similar characteristics. 500 Fixed-Rate, FHA loans would be pooled together and issued into a MBS but you wouldn't see a couple of JUMBO loans thrown in just for fun. The MBS is then rated by a third party company who audits the files, writes up a prospectus of the history of the company issuing the MBS and the type of MBS issued by that company in the past. The MBS then gets a rating which tells investors how "secure" the pool is and what rates of return to expect on their investment.

My purpose here is to share with you the different places 100% financing programs end up so you can understand the news articles you read... 

It helps to keep in mind there are multiple CATEGORIES of mortgage programs that are sold into MBS:

  1. Government Loans - FHA and VA have not changed in the past 2 weeks. FHA still offers 97% financing and VA 100% These loans are pooled into government MBS which are issued with a GNMA (Ginnie Mae) guarantee that investors won't lose money. That's why these loans continue to have investors and offer low rates of interest.
  2. 'A' Paper 80/20 Loans - These are for clients with 660 and higher credit scores (generally). The first lien is sold in a normal conforming MBS(mortgage backed security) and the second is typically held in portfolio by a large lender and in some cases sold into a MBS of equity loans. The 80% loan which is sold into a MBS is grouped with other 80% loans, 90% loans, etc. Not every loan in that MBS has 100% financing which offsets the risk. Because the lender with the second mortgage for 20% is the one most likely to lose money in a foreclosure, higher risk on these loans is usually offset by higher rates for the second lien.
  3. Alt-A Paper 80/20 - Typically, these are 80/20 loans and include one or more non-conforming characteristics such as stated income, no income, investment property, etc. These loans are sold into Alt-A MBS and require credit scores typically 640 and up. In some cases, the first liens are even sold into conforming MBS.
  4. 100% Single Loans - These loans carry private mortgage insurance which is an insurance policy to protect against loan default. Often the charge of this insurance is paid by the borrower but sometimes is paid by the lender usually resulting in higher closing costs or interest rate to the borrower.
  5. Sub-prime Paper 80/20 or 100% Loans - These loan programs are sold into sub-prime mortgage backed securities and there is a lot of diversity in this category. There are no standards other than those set by the market and rating agencies. If you put together a sub-prime MBS pool and it performs, then you can write more of these loans and the likelihood is that investors will buy your next MBS.

    Buyers of these MBS in recent years have included Fannie Mae and Freddie Mac....no more. Also, due to a down-turn in real estate values combined with many of these loans being 2 year fixed rates, defaults are up and early payoffs are up. In other words, those that INVESTED in these securities are losing money. When that happens, it's harder to find new investors. Take FNMA & FHLMC out of the picture and you can see the crunch. 

On 3/12/07 - Fitch (which is a rating agency) rated a 1.7 billion ALT-A Mortgage Backed Security of Countrywide and Indymac Bank paper and upgraded 1 class and affirmed all of the rest. What does this mean? It means that 1 year after this MBS was issued, the security is performing at or even a little above investor expectations. In other words...ALT-A paper seems ok at the moment.

Hopefully this will help you to better understand the news articles you read about the performance of mortgage backed securities. When someone says, "Lender B is still doing sub-prime 100% loans with a 680 score" you now know they aren't doing sub-prime paper because at that FICO they are probably doing ALT-A. If another person claims, "Countrywide no longer does 100% loans" you can know that isn't true. They may have stopped offering 100% sub-prime loans but they still do Alt-A, A paper and Government.

Lastly, keep in mind that not all lenders put loans into a MBS. Some lenders, mainly banks like Bank of America, Chase, Wells Fargo, have some loans they keep in "portfolio" meaning they keep them in the bank. Because of this, they can make any underwriting decision they want on these loans as only the bank and the bank's stockholders have to be comfortable with the decision to lend.

Be informed....be aware....and be prepared so you can face the changes this market is bringing us all.

©2007 Ken Stampe

Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com  

 

What resource do SMART home buyers use?… Mortgage Calculator Bank.com 

 

Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan
To really geek out on this topic, here is a link to a rating Fitch did yesterday on what is basically Aurora Loan Service loan programs, originated by Mortgage Lenders Network (MLN) and securitized via SASCO as a conduit.  Here's the link
Mar 14, 2007 05:23 AM
Anonymous
Mikey

Just to give some context of the how many people would be affected by the subprime shakeout (if ones assumes under 640 will be restricted much more).

I think the shakeout will be much more interesting if they start requiring at least some documentation of income, that would shake everything to its core. And if you think about how crazy that statement is, requiring some modicum of documentation of income, you'll know just how lax standards have become.

Inman called the new lending, the "credit card model". They are exactly right, sign your name, get a card. Sign your name, get a house. The difference of course is that credit cards are more properly pricing for risk, and trillions of dollars later the mortgage people are just starting to figure that out.

Mar 14, 2007 05:44 AM
#2
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

Right, so 73% of the market will remain largely unaffected. Well, I take that back. I remember back a few years ago when the OCC came down hard on a major bank who had a sub-prime subsidiary that after an audit was found to have given sub-prime programs and rates to people with over 700 credit scores. The bank's response was that the sub-prime subsidiary didn't have any A-paper programs and so if the buyer took the sub-prime deal, what was the sub-prime company to do? The regulator's response? You're a BANK! YOU have a fiduciary RESPONSIBILITY to provide the best financing possible to your customer. We don't care if your sub-prime subsidiary doesn't have A paper loans. That's YOUR PROBLEM...FIX IT.

So I guess history teaches us that even though 73% of the market may be "Prime" credit, they can be shoved into high-rate sub-prime loans due to ignorance and manipulation. In that sense, this retraction is probably a really good thing to happen.

Mar 14, 2007 05:59 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Ken, You are my hero!!! I have been wondering what the heck Alt-A meant but hadn't got around to asking the question. This is an excellent post for a clueless Broker like myself. Thank you. Now it all makes sense. Well, almost:)

So Mikey, what you are saying is they may start asking for income verification? The last few loans I did I was able to verify my income by using my business bank statements(I'm an S-corp). That was a good thing because my tax personal tax returns are quite a bit lower. Since I'm a one man corp I think they qualified 75% of my biz income. Does that sound right?

Mar 14, 2007 11:00 AM
Anonymous
Mikey

BB-Just perusing the rate sheets what you are talking about is considered a "Full Doc" loan-

"FULL DOC- SELF EMPLOYED - Previous year's taxes, and current YTD bank statements or 12 months business bank statements 75% of business bank statement deposits can be used with a max LTV of 95% and max 95% CLTV"

For example. The issue with Alt-a are the number of people who stated their income by filling out a form (I believe it is called a Form 1003) saying they earn X amount. The banks basically adopted the credit card model (think about you filling out a credit card form, there is a box for what you do and how much you make, but they don't verify it) fill out a form get a house. They figured why would anyone lie they would just be screwing themselves and committing loan fraud. So someone with a great FICO going stated income would be considered Alt-A.

It wasn't until recently that they started at least verifying that the job on the form matched in the ballpark salary posted (a trivial task, but all someone would have to do to "earn" more would be to change the job type). Of course you can tell that this is a situation just begging for fraud, unscrupulous loan officers could fill out the form and it would just be another piece of paper to sign out of all others blindly signed by the borrower. Some borrowers did it willingly. But if you watch out there (and you can see signs of it here on AR) the LO attitude is/was "the borrower doesn't qualify under Full Doc, I HAVE TO GO STATED". So in other words the DTI calculation for full documentation would disqualify them, so the broker just switches to stated income and gets the loan done. This is not a rare event at all, it was more of the rule than the exception.

Mar 14, 2007 08:18 PM
#5
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time
Thanks Mikey, Oh I do know many folks were using the stated income loan. Some were even w-2 employees! Hey if you are a w-2 employee and they have you going stated you can be sure it's fraudulent. Glad they put a stop to it.
Mar 15, 2007 01:23 AM
Stephen Katz
Katz Mortgage Team, a branch of VanDyk Mortgage Corporation - Atlanta, GA
Branch Manager, CMPS

Are you still offering 100% investor loans?

Stephen

Jun 27, 2007 04:14 AM
Ken Stampe
iBrandPlan.com - Grow your e-Profile & Brand - Dallas, TX
iBrandPlan

Frankly,

 I never closed a single 100% investor loan. They don't cash flow and the investors I work with prefer financing structured wherin the property cash flows.

Jul 02, 2007 04:09 PM