Risky loans - alive and well

Option ARMs remain an option. Despite problems in the mortgage market, brokers say lenders are still willing to make risky loans - including those that allow borrowers to make monthly payments that don't even cover the interest (so-called "option ARMs").

Also still widely available are "no-doc" loans, which require no income verification, and mortgages with no downpayment.

All of those loans fall into the so-called Alternative-A or Alt-A mortgage market, which caters to people with average credit scores who want riskier mortgages and has been one of the fastest growing segments of the home loan business in recent years.

Jim Moore, a mortgage broker in Grand Rapids, Michigan who also writes about mortgages for Miamibeach411.com, said he recently completed a $3 million refinance on a second home for a borrower who was out of work. "This wasn't even a no-documentation loan," says Moore. "This was a no-income loan, and the lender knew it."



Other brokers say they haven't had to turn away customers, either. George Duartes, who is the president of Fremont, Calif.-based Horizon Financial Associates, says his firm continues to be able to find banks who want to lend to the 30 percent of his clients who fall into the Alt-A category. "So far those clients have been able to get the loans they wanted," said Duartes.
Losses in loans made to the riskiest borrowers have raised fears that lenders would cease making many of the exotic loans that have become popular over the past few years. Nearly 40 percent of all loans made in 2006 fell into the subprime or Alt-A category.

Like most mortgages, Alt-A loans are sold by lenders to Wall Street investments banks, which package those loans into bonds called mortgage-backed securities. Mortgage-backed bonds are then sold to investors. Bonds based on he Alt-A loans are potentially riskier because in many cases borrowers do not prove their income, or have very little invested in their house.

In early March, rising delinquencies caused a dramatic sell off in the bonds backed by mortgages to the borrowers with poor credit quality. Analysts predicted that the investor distaste for those mortgages would spread into the Alt-A market as well. Indeed, in the past week two New York lenders American Home Mortgage and M&T Bank said they would pull back from making loans to the Alt-A market because investors were willing to pay less for those securities.

But mortgage bond traders say investors, who seemed nervous about the bonds a month ago, in the past few weeks have been coming back to the market. "We are seeing demand for these bonds picking up again," said a bond trader at one of the largest mortgage lenders in the country. He said yields, which rise with investor concerns, on most Alt-A bonds are up less than one tenth of a percent.

And George Hanzimanolis, who is president-elect of the National Association of Mortgage Brokers, says that while lenders in some instances are requiring higher credit scores and larger downpayments, it is only the riskiest of all loans that they are ceasing to make. "What lenders don't want to do anymore is layer their risks," says Hanzimanolis. "Most lenders have walked away from doing a pay option ARM mortgage when the borrower is just stating their income."
The problem is what may be good news for borrowers for, might have consequences down the road for lenders and investors. "We are going to see a lot of people lose lots of money in the Atl-A market," says Richard Bove, an analyst at Punk Ziegel. "Whatever pull back is happening is just happening for the moment."

By Stephen Gandel, Money Magazine senior writer