Posted by: John Tozzi on September 2, 2008
Alt-A mortgages were designed for people with good credit who had trouble documenting their income — people like the self-employed. Not as risky as subprime but not quite prime either, Alt-As made some news recently because they’re part of what’s ailing Fannie Mae and Freddie Mac. About half of their combined $3.1 billion loss in the second quarter came from bad Alt-A loans.
Part of the problem is that many of these loans, like their riskier subprime cousins, went to people who never should have gotten them. Not self-employed, maybe not employed at all. That’s why some call them liar loans: no documentation of income or assets.
This Barron’s article sums it up nicely:
A substantial portion of Fannie's and Freddie's credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers' income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers. In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.
So loans intended for self-employed home-buyers went instead to speculators. Now there's concern that Alt-As may lead another wave of defaults beyond the subprime crisis.
What does this have to do with small business owners? Entrepreneurs who took out Alt-A mortgages may be hit when their rates reset -- jeopardizing their homes at the same time the soft economy is squeezing their businesses. (The nightmare situation: rising mortgage payments and falling profit margins.) Sam Bornstein, a New Jersey accountant, first gave me a heads up about this a few weeks ago.
When I looked into this a little more, another concern surfaced. Small business owners with good credit (who can actually afford the homes they want to buy) may not be able to get Alt-A loans because so many people abused them as "liar loans," and nervous banks don't want to lend.
So we're still watching this unfold. But in the meantime, I'd like to hear from you. If you're self-employed and have an Alt-A loan, are you worried about making payments? Or if you're trying to buy a house, are you having trouble getting financing because you're self-employed? What other aspects to this story should we watch? Email me and let me know.