Customer Service 1 (888) 261-2693
Advanced Search

Who's Next in the Mortgage Meltdown

By Stansberry Research Interview Series
Monday, March 5, 2007

The subprime mortgage lenders have already been devastated.
 
Next up are "Alt-A" mortgages.
 
Alt-A mortgages are generally much like their subprime counterparts, requiring little documentation of income or offering payments even lower than the interest on the loan. Alt-A borrowers typically have better credit than those applying for subprime loans, but their credit isn't good enough for them to be considered for a prime loan.
 
Alt-As are one of the fastest-growing mortgage segments of the last four years. In 2003, Alt-A mortgages generated $85 billion in mortgage originations. Three years later, it was $400 billion. Altogether, Alt-A mortgages comprised 16% of all mortgage originations for 2006.
 
And soon they'll be going the way of subprimes.
 
In the last couple of years, many Alt-A lenders lowered their credit standards to keep loans coming in the door. This brought in a lot of borrowers who really should have been in the subprime category.
 
UBS AG recently announced that defaults for these types of mortgages doubled in the last 14 months. Currently, late payments are at four times their historical averages. UBS also reported that Alt-A delinquencies (payments more than 60 days overdue) are around 2.4%, about one-fifth the 10.5% subprime default rate.
 
That might not seem like a lot of delinquencies... until you consider that the Alt-A delinquency rate was only 1.1% in November 2005.
 
After all, even with decent credit, you can get into a lot of trouble if you're in the wrong mortgage. Most insidious is the option adjustable-rate mortgage: a mortgage that allows you to choose from several options for your monthly mortgage payment.
 
One option is to pay less than the interest amount due on your principal. So essentially, you're just throwing money away, since your actual principal is growing as the interest you fail to pay is added.
 
Once the principal hits a certain amount, interest payments jump to the current market rate or even higher. We're talking about a multiple percentage-point jump in a single month. So it's little surprise that 3.7% of Alt-A mortgages originated in 2006 are already delinquent.
 
Remember, we're talking about mortgages that were originated just last year.
 
In other words, the same cracks that appeared in the subprimes last summer are now showing up in the Alt-As. Earlier this week, IndyMac (NDE), the largest Alt-A mortgage lender in the U.S., announced that its 2007 income will probably be lower than 2006.
 
More bad news is coming for the Alt-As. Add IndyMac (NDE), Impac Mortgage Holdings (IMH) and American Home Mortgage Investment (AHM) to your watch list and get ready for some fireworks in the coming months.
 
Good trading,
 
Graham




Recent Articles
Market Notes
Worst-Performing S&P 500 Stocks (Past 52 Weeks) 
Advanced Micro Devices
(-64.2%)
Wendy's
(-45.6%)
First Data Corporation
(-43.6%)
PMC-Sierra
(-41.3%)
SanDisk
(-39.5%)

Best-Performing S&P 500 Stocks (Past 52 Weeks)
Goodyear Tire
(+89.7%)
Equity Office Properties
(+84.8%)
Allegheny Technologies
(+83.5%)
OfficeMax
(+75.1%)
Phelps Dodge
(+73.1%)
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%