Problems Facing Alt-A Mortgage-Backed Securities Pose Latest Threat To Investors
Securities backed by Alt-A mortgages are beginning to result in substantial losses for investors. Valuations for securities backed by these mortgages are now falling sharply, forcing certain investment funds to unwind or meet margin calls. Indeed, as a result of the worsening credit market and faltering economy, prices for these securities fell to new lows in February. As Jody Shenn reported in Bloomberg.com on February 29, Standard & Poor’s has indicated that it may cut ratings on nearly $13 billion of securities backed by Alt-A mortgages because of a “persistent rise” in loan delinquencies. This includes 1,887 debt classes tied to loans issued in 2006 and the first half of 2007.
Alt-A residential mortgages -- euphemistically known as “liar loans” in the industry because borrowers were often not required to show proof of income or assets -- have become the latest shoe to drop in the credit crisis threatening the U.S. economy. While many exotic mortgages were issued to subprime borrowers, individuals with slightly better credit ratings also took advantage of these exotic loans. The Alt-A market is highly diverse and includes loans that feature fixed interest rates as well as ‘option’ ARMs, with lower minimum payments. In terms of risk, Alt-A loans are typically characterized as loans that fall somewhere between prime and subprime.
Increasing default rates among Alt-A borrowers are particularly disturbing and should raise alarm bells for any investor who owns securities backed by Alt-A mortgages. According to Stuart Goldberg, a managing director at Marathon Asset Management LLC, Alt-A securities may in fact be riskier for investors than securities backed by subprime debt. The reason is that Alt-A securities were created with less protection for investors than subprime bonds with similar ratings. In 2007, Standard & Poor’s downgraded more than 400 Alt-A securities created in 2005, approximately 1,000 Alt-A securities issued in 2006 and about 900 created in 2007. The downgrades included repeat actions on the same bonds.
Firms are wasting no time in taking steps to cut their losses. For example, London-based Peloton Partners LLP, which owns both subprime and “safer” Alt-A mortgage debt is already in the process of liquidating a $1.8 billion hedge fund. Problems for UBS and Merrill Lynch loom on the horizon since they also hold many Alt-A mortgage securities.
The sharp decline in Alt-A securities appears to have begun on February 14, 2008 when UBS revealed the size of its Alt-A holdings and speculation spread that the firm would soon sell a large amount. According to a JP Morgan Chase report, on February 22, securities rated AAA and backed by 30-year fixed rate Alt-A loans in excess of $417,000 fell to 12 cents less per dollar of principal than similar securities guaranteed by Fannie Mae or other government-related entities. This was more than twice the loss of 5.5 cents for these securities only a few weeks earlier.
The threat posed by the decline of Alt-A mortgage-backed securities may be especially ominous in light of the fact that approximately $950 billion of Alt-A mortgage securities are outstanding. This contrasts with about $650 billion of outstanding subprime securities. Last quarter, UBS, which owned over $21 billion of top-rated Alt-A securities on December 31, 2007, marked them down by $800 million. Merrill Lynch owns $2.7 billion of Alt-A debt, primarily securities.
The unstable and volatile Alt-A market should cause investors to question just how safe their money is in mutual funds and other investments backed by Alt-A mortgages. Individual and institutional investors alike may be at far greater risk of losing money than they realize.
Page Perry, LLC is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling municipalities and other institutional investors regarding their subprime investment problems and have brought claims for investors with losses relating to subprimes. For further information, please contact us.
