A report released by Standard & Poor’s Ratings Services said the issuance of Alt-A mortgages plummeted in the third quarter, and is projected to fall further in the fourth quarter and early 2008 thanks to ongoing liquidity concerns.
The value of Alt-A mortgages issued during the third quarter dropped a whopping 64 percent to $39.3 billion from the second quarter’s record high of $109.5 billion, more than 50 percent less than the same period of 2005 and 2006.
Despite the decline, the higher-risk mortgages still made up 28% of all mortgages originated during the quarter, the same level as two years earlier.
S&P said “unprecedented credit and liquidity disruptions” in the residential mortgage-backed securities market, falling home prices, and the layered risk within the Alt-A market will continue to limit the issuance of such securities.
Mortgage lenders have limited their Alt-A offerings as delinquencies steadily rise, with Alt-A loans originated in 2006 sporting a delinquency rate of 4.71% compared to 1.97% for similar loans from 2005 and 1.07% for loans issued in 2004.
The trend for 2007 loans is even more bleak than 2006, signifying that last year could be “the worst ever for the Alt-A market,” said S&P.
“There are no signs of the trend abating in the near term. In response, investor demand for U.S. residential mortgage-backed securities has fallen sharply, which has limited a key source of funding available to originators and issuers from the secondary market,” said S&P Credit Analyst Jeff Watson.
Two weeks ago, S&P said delinquencies more than doubled on Alt-A bonds issued in 2006 compared to 2005, according to a study of the top 20 issuers of Alt-A securities that make up 95 percent of the total market.
Alt-A mortgages are generally classified as limited documentation loans that represent a higher credit risk to issuing banks and investors.