Sunday, March 11, 2007

Sub-Prime Problems Moving Into Other Loan Areas

From CBS MarketWatch:

Problems in the subprime mortgage business may be spreading to other parts of the home loan market.

Losses are creeping up on so-called Alt-A loans, which are considered less risky than subprime mortgages, but may have lower credit quality than "prime" loans.

Alt-A loans were originally designed for borrowers with clean credit records, but with other issues that often meant they provided fewer documents or even no documents showing what they earned. These loans were attractive to mortgage investors because they offered higher yields than traditional "prime" home loans, but were underpinned by the cleaner credit records of the borrowers.

The popularity of Alt-A mortgages exploded in recent years. A record $400 billion of these loans were originated in 2006. They accounted for 13.4% of all mortgages offered last year, up from 2.1% in 2003, according to industry publisher Inside Mortgage Finance.

This was bound to happen -- it's not a matter of if, but when.

Notice the following points.

1.) The amount of these loans has increased from 2.1% of all loans in 2003 to 13.4% in 2006. That's a 6 fold increase. That indicates the degree of credit degradation that has occurred in the lending business during the housing bubble.

2.) The article goes on to state that Alt-A loans have absorbed some subprime loans. That means the subprime numbers being reported are too low; they are actually worse than reported. Not good.

3.) Financial companies make up the largest percentage of the S&P 500. That means the largest sector in that market average will be under increased selling pressure if these stories persist.