Warning Of Sub-Prime Contagion Spreading

| March 14, 2007

From MarketWatch

Alt-A mortgage losses accelerate, study says

SAN FRANCISCO (MarketWatch) – Losses on so-called Alt-A home loans are accelerating and could hit the value of lower-rated portions of some mortgage-backed securities, according to a study released on Tuesday. Delinquencies have jumped on Alt-A mortgages originated last year with adjustable interest rates that let borrowers pay only the interest for a time. These loans, known as Alt-A ARM IOs, have seen a four-fold increase delinquencies of at least 60 days, four times the level of similar loans originated in 2003 and 2004.

The deterioration is “alarming” for investors in lower-rated bonds that are backed by these loans, he said. Mortgage loans are usually packaged together and sold as mortgage-backed securities (MBS) to institutions such as pension funds, insurers, and hedge funds. Liu’s study suggests that losses in Alt-A ARM IO mortgages could wipe out the credit support on BBB- rated tranches of some MBS.

This is a big open question – can the problems witnessed in sub-prime be contained there? If not the risk is broader than many suspect. Only time will tell.

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Category: Credit Backlash, Economics, Main

About the Author ()

Bruce Henderson is a former Marine who focuses custom data mining and visualization technologies on the economy and other disasters.

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