Mortgage Alt-A , short for Alternative A-paper , is a type of US mortgage that, for various reasons, is considered more risky than A-paper, or "prime", and less risky than "subprime," the category most at risk. For this reason, as well as in some cases their size, the Alt-A loan is not eligible for purchase by Fannie Mae or Freddie Mac. The Alt-A interest rate, which is determined by credit risk, therefore tends to lie between prime and subprime home loans, although no single definition of Alt-A is accepted. Usually A-Alt mortgages are characterized by borrowers with incomplete documentation, lower credit scores, higher loan-to-value, and more investment properties. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as a mortgage borrower with a FICO score below 680 while Alt-A is traditionally defined as a less complete documentation loan. Alt-A mortgage may have excellent credit but may not meet underwriting criteria for other reasons. Over the last decade, a large number of mortgages Alt-A is generated from refinancings, rather than property purchases.
Alt-A loans should not be confused with alternative documentation loans, which are usually considered to have the same risks as complete documentation loans though using different documents to verify relevant information. As with any subprime mortgage, most of the Alt-A mortgages tend to come from specialized lenders, not banks and banks.
Video Alt-A
Characteristics of Alt-A
In the US mortgage industry, different mortgage products are generally determined by how they differ from "appropriate" or "agency" mortgage types, which are secured by Government-sponsored Enterprises (GSE) Fannie Mae and Freddie Mac.
There are many factors that may lead to unqualified mortgages under the traditional GSE loan guidelines even though borrower's creditworthiness is generally strong. Some of the more important factors are:
- Reduce the borrower's revenue and asset documentation (e.g., "mentioned income", "asset mentioned", "no earnings verification")
- The debt-to-borrower's debt ratio above what Fannie or Freddie will allow for the borrower's credit, assets and type of property financed
- Credit history with too many problems to qualify for an "agent" loan, but not so much that it requires subprime loans (eg, low FICO scores or serious delinquency, but no recent bills or bankruptcy)
- Loan to value ratios (percentage of borrowed property prices) above the agency limit for the property, occupancy or characteristics of the borrower involved
In this way, the Alt-A loan is an "alternative" to compliance standards, GSE backed mortgages.
Maps Alt-A
Borrower Considerations
An example of someone who asks a Saved Revenue mortgage is an individual with multiple sources of income that requires a number of incriminating documents to be documented, such as income from self-employment or investment. Note that reducing documentation loans still require borrowers to authorize lenders to order their tax returns randomly from the Internal Revenue Service to verify revenue on the app.
The same documentation features are available under the "subprime" guidelines, and similar ones may even be available under the agency's guidelines. Alt-A and subprime are different in that, in general, the Alt-A borrower will have sufficient financial profiles to qualify for a "corresponding" mortgage, if it were not for one of the above-mentioned factors, whereas the subprime borrower will experience credit , income, or very weak asset characteristics. However, in cases where borrowers, property and loan characteristics meet institutional guidance especially well, automated pre-approval systems Fannie and Freddie generally provide documentation features that are automatically deducted at no additional cost. More expensive Alt-A or subprime loans are not necessary for powerful borrowers to speed up their applications.
In addition to the reduced documentation features, the Alt-A guide usually also offers greater flexibility to the borrower than the agency's guidance on credit scores of borrowers, earnings, and asset levels. So a borrower whose financial profile may not meet the agent's guidelines for the terms of the loan requested may still qualify under the Alt-A guide.
Property and occupancy considerations
In addition to borrower loans and financial profiles, the GSE standard is also generally the most stringent regarding how much of the value of certain types of property or purchase price is allowed to lend to owner-occupied, second ("vacation") and non-owner occupied ("investment") home, and under what conditions. This combination of property and occupancy factors with a given borrower's profile can move loans from the "major" category of loans corresponding to agencies and into less stringent categories such as Alt-A and subprima. For example, Fannie Mae may agree to purchase all loans made by a particular lender on the homes of two single families in a certain area at a certain maximum LTV for borrowers within the limits of income, assets and credits granted. Those borrowers out of bounds, or those seeking loans on maximum LTV for second homes, will need to apply for an Alt-A loan. Borrowers are still far beyond revenue, assets and credit limits may need to consider subprime financing - difficult to find in 2008.
Similar to Alt-A loans, jumbo and super-jumbo categories generally use amalgam agencies and Alt-A guidelines for eligible borrowers while allowing maximum loan amounts greater than those allowed by GSEs (as 2007, $ 417,000 for one out-of-home family Alaska, Hawaii, Guam and the US Virgin Islands).
Risk revaluation
During the subprime mortgage crisis that began in 2007, the Alt-A mortgage is under special scrutiny.
One problem associated with the Alt-A loan is the lack of necessary evidence or documentation that needs to be approved for the loan. Thus, lenders may tend to suggest borrowers change their income or assets to qualify for larger loans; in the long run, borrowers may not be able to pay their payments but lenders still earn big bucks. Because the Alt-A loan is also the financing option for most non-occupied owners, investment properties, as their class represents a much greater possibility of borrower's default than conventional, adjusting mortgages, because people are more likely to leave properties where they do not live than risk losing their main home. In 2008, there was strong evidence of weakness among securities backed by the Alt-A mortgage for reasons similar to the crisis in those supported by subprime.
Since Alt-A loans are not primarily purchased by GSE, they are becoming more expensive and harder to find due to the general crisis in the market for mortgage-backed securities. Alt-A loans are still available from individual agencies that hold them "in portfolios" rather than reselling to investors, and by mid 2008 there was a strong push for FNMA and FHLMC to be allowed to buy more from them. However, interest rates in this category of loans increased substantially between 2006 and 2008 as a result of the shrinking secondary market.
See also
- Paper-A
- Subprime Loans
References
External links
- Fannie Mae Home Page
- Freddie Mac Home Page
- Mortgage Bankers Association of America
(Dead Link) Many fly pieces from implosion mortgages - Houston Texas News
- Alt-A Mortgages Next Risk for the Housing Market as Surge Default - Bloomberg.com
Source of the article : Wikipedia
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