In the leadup to the financial crisis, lenders did some pretty silly things.
The securitization bonanza and the attendant proliferation of the “originate to sell” model drove lenders to adopt increasingly lax underwriting standards.
Put simply, the pool of creditworthy borrowers is by definition finite. That’s a problem because the securitization machine needs feeding. So what do you do if you’re a lender? Why, you expand the pool of eligible borrowers by making it easier to get a loan.
And we’re not talking about a giving would-be buyers a few FICO points worth of leeway here. We’re talking about the infamous “liar loans” which produced myriad tales of a market run horribly amok as everyone from maids to strippers could buy a McMansion with little to nothing in the way of documentation.
Well don’t look now, but the infamous Alt-As are making a comeback thanks to “big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP [who] are lobbying lenders to make more of these “liar’ loans—or even buying loan-origination companies to control more of the supply themselves,” WSJ reports.
Once again, it’s the same old story. ZIRP has left investors starved for yield and that’s herding money into riskier and riskier assets and creating demand for paper backed by everything from subprime auto to P2P loans. Alt-As can carry rates as high as 8% which obviously looks great to anyone who’s stuck squeezing 300 bps out of something you picked up during last year’s IG issuance bonanza.
As WSJ goes on to note, the structure is a bit different this time around as large banks are steering clear of the market. “Virtually none of these Alt-A loans are being sliced and packaged into securities,” The Journal writes. “Instead, private-equity firms, hedge funds and mutual-fund companies are playing a larger role as buyers, placing the loans into private funds that are sold to institutional investors and wealthy clients.”
Of course pooling the loans and issuing ABS versus pooling the loans and selling shares of funds backed by those loans are really the same thing. In both cases, investors are betting on a pile of possibly risky mortgages extended to borrowers who for whatever reason don’t meet the requirement for a standard 30-year fixed.
For their part, money managers are rolling out the same tired excuse about reaching “underserved corners” of the market where unnecessary restrictions are keeping “some folks” from buying their dream home. Here’s WSJ again:
By backing these loans, money managers said they would reach an underserved corner of the housing market: Borrowers who have good credit but might be self-employed or report income sporadically. In part because more Americans work that way, some money managers expect the market could increase to hundreds of billions of dollars each year, or more than 10% of the total mortgage debt outstanding.
Alt-A loans gained prominence in the years leading up to the financial crisis, with lenders originating $400 billion at their peak in 2006, according to trade publication Inside Mortgage Finance.
Derided as “liar loans,” they were often extended to people who had no proof of income. By February 2010, about 26% of Alt-A mortgages were 90 or more days delinquent, up from 2% three years earlier, according to CoreLogic, a real-estate data and analytics company.
That compares with conventional conforming mortgages, which saw delinquencies of 7.2% in February 2010, up from 1.4% three years earlier.
The generation of Alt-A loans has been minimal since then. Just $17 billion in Alt-A loans were originated in 2014, compared with $767 billion for conventional mortgages, according to Inside Mortgage Finance, which estimates that $18 billion to $20 billion were made in 2015.
Some money managers are apparently making the rounds in an effort to convince mortgage companies to help get the ball rolling. Essentially, they want to act as the lender by bankrolling the loans, but aren't too keen on bothering with the actual homebuyers and all of the paperwork. The idea then, is to partner up with mortgage firms who would theoretically take care of the administrative side of things.
But that's not good enough for some asset managers. Take Minneapolis-based Varde Partners, for instance. Rather than haggle with mortgage companies, the firm simply went out and bought one through which it will lend to Alt-A borrowers.
Needless to say, this isn't materially different from what was going on prior to the crisis even if the "Alt-A" has been given a new nickname (the "nonqualified mortgage") in an effort to shed the stigma.
This is still just Wall Street forcing the issue on mortgages and selling the risk to investors who are happy to go along for the ride as long as the yield is there.
It will end in tears just as it did before, for everyone involved - especially the homeowners.