Following Freddie Mac’s August 12th announcement that it won’t purchase subprime loans fitting New York State’s new definition for that credit class, Fannie Mae recently announced that it too will not purchase New York Subprime loans. Fannie Mae will not purchase or securitize any mortgage loan that meets the definition of a subprime home loan under New York law, regardless of whether any provision of the law is preempted for a particular mortgage or for a particular originator,” senior vice president Michael Quinn wrote in a seller bulletin dated Aug. 19.
Quinn suggested that New York’s new definition of subprime falls under what the government-sponsored entity (GSE) sees as “high-cost” or “high-risk” home loans, and said that Fannie has had a long-standing policy of not purchasing such mortgage loans for securitization or for its retained portfolio.
Housing Wire reported that the percentage of subprime borrowers 60 or more days in arrears at the end of last month surged for both the 2006 and 2007 vintages, up nearly 7 and 11 percent compared to June, respectively. Sources indicate one of the reasons for this is because a large volume of repayment plans put into place earlier this year for troubled subprime borrowers are now failing. According to mortgage lender Jeff Moran, “FHA mortgage rates have increased slightly with the fears of Fannie and Freddie being taken over by the Fed.” A recent report from Moody’s Investors Service found that more than 50 percent of subprime adjustable-rate mortgages modified during the first half of 2007 had become 60 or more days delinquent by the end of March 2008.
Who will lend to New York subprime mortgage holders now?
It appears now that the only lender willing to handle subprime loans in New York is the federal government through the Federal Housing Administration (FHA) loans. As a result of new legislation passed to address the foreclosure epidemic, the FHA has two new programs: FHASecure loans which are due to expire on December 31, 2008 and HOPE for Homeowners, due to start on October 1, 2008. These programs are foreclosure prevention programs, and only those facing foreclosure due to recently resetting or soon to reset subprime loans.
Alt-A Loans –Another Serious Cause for Concern
Another type of loan that is problematic that isn’t being addressed by either of the GSEs, Fannie Mae and Freddie Mac, or the FHA: Alt-A loans. Alt-A loan default rates are also rising at alarming levels. HousingWire.com reports that Alt-A delinquencies continue to worsen in July. It continues by reporting that the 2005 vintage — which should be seasoned by now — saw delinquencies jump an eye-opening 29 percent to 9.72 percent of remaining loans in the vintage; the increase is somewhat telling as well, given that prepayment rates actually fell by more than 5 percent in the same timeframe. Beyond the 2005 vintage, 2006 vintage Alt-A loans saw 60+ day delinquencies rise from 22.74 percent in June to nearly 25 percent in July; for the 2007 vintage, delinquencies rose from 20 percent to 21.35 percent. Weighted average loss severity also increased for Alt-A loan liquidations during July, according to the Clayton data: hitting 39.7 percent, compared to 38.6 percent one month earlier.
What is an Alt-A Loan?
An Alt-A loan is also known as an alternative documentation loan. The Mortgage Reference Library provides an example: a self employed borrower who makes $250,000 a year, but for tax purposes, writes a lot of that income off. These FHA home loans are held by borrowers with good credit that don’t qualify for conventional loans due to various circumstances like being self employed or having an income that is comprised mainly of commissions or bonuses. Another example is someone whose credit scores are slightly lower than what is required for an A paper loan, or someone who doesn’t have quite enough asset documentation. In short, Alt-A loan holders are not as high-risk as subprime loans but are deficient in some way to qualify for an A paper loan. Alt-A loans typically carry a slightly higher interest rate than conventional loans.
So, what’s going to happen with Alt-A loans and people who’ve lost their jobs?
With all the attention that the fed is giving to subprime loans, what about the Alt-A loans? There is no bailout for these types of loans. Will Fannie Mae and Freddie Mac decide not to purchase these loans like they’ve decided not to purchase New York subprime loans? What about people facing foreclosure due to job loss, medical bills or other financial distress? Like holders of Alt-A loans, people who are simply in financial distress due to job loss, medical bills or other reasons are not being addressed by the federal government or GSEs. Unless a solution that addresses all the reasons foreclosures continue to rise is reached, the foreclosure epidemic doesn’t look like it’s going to end any time soon. It will be interesting to see how the new president will handle this being that our country will be well in the midst of a housing and foreclosure crisis when the new president takes office.
