It's not just the subprime stew that helped slide the housing market into a slough. Housing is also mired in a muskeg of failing "Alt-A" mortgages.
Suffering from the same untried underwriting and difficult to decipher disclosures that swamped subprime borrowers with foreclosures, "Alt-A" loans made in 2006 suffered 90-day or longer delinquency rates 2.5 times higher than those made in 2005 and 4 times higher than those in 2004, according to LoanPerformance data crunched by analysts at Standard and Poors.
The mortgages analyzed included loans that were foreclosed and represent real estate-owned assets, loans that are in foreclosure, and loans in bankruptcy.
"Alt-A" loans, also called "nontraditional" mortgages, are typically offered to borrowers with credit scores between 620 and 700 and include interest-only loans, option ARMs, "no-doc" loans, those requiring little if any income documentation, and others.
"During 2006, lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers not only to subprime homeowners, but also to Alt-A homeowners," according to the S&P report from four analysts, Mark Goldenberg, Jeff Watson, Michael Stock, and Martin Kennedy.
Now, along with struggling subprime lenders tightening underwriting standards to hold on, surviving nontraditional lenders have dropped or curtailed 100-percent financing and no-doc deals, they require higher credit scores and they have cut maximum loan amounts, ultimately reducing the number of qualifying applicants.
"As underwriting standards have tightened in 2007 and rates of home price appreciation slowed or declined, indebted homeowners who experience financial trouble may have fewer refinancing options and may find it difficult to avoid going into foreclosure," according to S&P.
Fourteen months after origination, 4.21 percent of 2006's Alt-A loans face 90-plus-day delinquencies. The rate is 1.59 percent for 2005 Alt-A loans and 0.91 for 2004 originations, in both cases also after 14 months of existence. The figures exclude pay-option adjustable rate mortgages (ARMs) which allow borrowers, within the terms, to choose a payment amount each month.
S&P says once borrowers hit a 60-day delinquency, there's often no turning back. The old easy-money mortgage market just isn't what it used to be.
Many homeowners fall behind in today's market because they opted for a risky ARM just as the market was cycling to a rising-interest rate environment with flat and falling home prices. With no bail out equity and tighter mortgage money, refinancing is off the table.
"We continue to see migration from 60-plus-day to 90-plus-day delinquencies within the 2006 vintage, suggesting that homeowners who experience early delinquencies are finding it increasingly difficult to refinance or work out problems, as opposed to being able to 'cure' falling behind on payments," according to S&P.
Years in the making, revamped federal guidelines "Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" were designed to address the problem.
The regulations may have been too little too late. Lenders not federally regulated slipped under the radar and the feds are still hashing out the disclosures.
The share of failing Alt-A loans reveals most homeowners are slogging through the boggy market, but that could be just dumb luck.
The Federal Trade Commission's recent "Improving Consumer Mortgage Disclosures -- An Empirical Assessment of Current and Prototype Disclosure Forms" indicated today's 30-year-old mortgage disclosures do more to daze than help consumers discern the annual percentage rate (APR), cash due at closing, monthly payment, settlement costs, loan amount, balloon payments, prepayment penalties, and other terms.
Uncertain when the rise in failing loans will peak, analysts continue to rake through the growing mounds of muck.
"We are currently examining how the risk profile clearly increased in the Alt-A market in 2006 as compared with previous years and the impact of that increase on performance," the S&P analysts reported.