Alt-A mortgage issuance drops sharply

NEW YORK — Issuance of so-called Alt-A mortgages tumbled in the third quarter as the credit crunch peaked, according to a report by Standard & Poor's Ratings Services, which projected more declines into early 2008, citing limited liquidity.

The value of Alt-A mortgages, which typically go to borrowers whose credit is deemed good enough to forgo proof of claimed assets or income, issued in the third quarter fell 64 percent to $39.3 billion from the second quarter's record high of $109.5 billion, according to the Dec. 27 report. The third quarter's issuance was less than half that seen in the same period of 2005 and 2006.

However, the mortgages still made up 28 percent of all mortgages originated in the quarter, the same level as two years earlier.

Alt-A mortgages typically have results in higher interest rates because the lack of proof makes such borrowers increased credit risks. As the credit crunch hit full-steam in August, investors' resistance to buying any mortgages deemed risky soared because of a sharp rise in past-due home loans.

S&P expects further declines of Alt-A issuance in the fourth quarter and early 2008 as the industry continues to be affected by limited liquidity in the residential mortgage-backed securities market.

S&P said the dramatic drop is the result of "unprecedented credit and liquidity disruptions" for both borrowers and lenders in the U.S. residential-mortgage market that emerged over the summer in response to the rapidly deteriorating housing sector.

In its report, the ratings agency said it believes the proliferation of layered risk within the Alt-A market and stagnant or declining home-price appreciation appear to be the leading causes of the current performance downturn.

Alt-A delinquencies have also been rising, with trends of such loans made in 2006 swamping prior years. After 18 months, Alt-A loans originated in 2006 had a delinquency rate of 4.71 percent, versus 1.97 percent for such loans from 2005 and 1.07 percent for 2004 loans. The trend for 2007 loans is even worse than 2006, suggesting last year could be "the worst ever for the Alt-A market," S&P said.

S&P Credit Analyst Jeff Watson said, "There are no signs of the trend abating in the near term. In response, investor demand for U.S. residential mortgage-backed securities has fallen sharply, which has limited a key source of funding available to originators and issuers from the secondary market."

In the report, S&P said the spike in severe delinquencies is unprecedented, and expressed concern that an extended housing downturn could lead to a prolonged period of high delinquencies and, ultimately, high cumulative losses.

S&P said high delinquencies and realized losses resulted in its downgrading of 158 classes from 89 Alt-A residential mortgage-backed securities transactions in August, and the downgrading of an additional 518 classes from 128 Alt-A residential mortgage-backed securities transactions in October.

In November, S&P placed 484 classes of U.S. residential mortgage-backed securities backed by first-lien Alt-A mortgage loans on CreditWatch with negative implications, as well as its ratings on 63 classes of U.S. net interest margin securities transactions backed by the affected U.S. first-lien Alt-A mortgage securities.