An Alt-A mortgage, short for Alternative A-paper , is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper , or "prime", and less risky than " subprime ," the riskiest category. For these reasons, as well as in some cases their size, Alt-A loans are not eligible for purchase by Fannie Mae or Freddie Mac . Alt-A interest rates, which are determined by credit risk , therefore tend to be between those of prime and subprime home loans, although there is no single accepted definition of Alt-A. Typically Alt-A mortgages are characterized by borrowers with less than full documentation, average credit scores , higher loan-to-values , and more investment properties and secondary homes. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as mortgage borrowers with a FICO score of below 680 while Alt-A is traditionally defined as loans lacking full documentation. Alt-A mortgages may have excellent credit but may not meet underwriting criteria for other reasons. During the past decade, a significant amount of Alt-A mortgages resulted from refinancings , rather than property purchases.
32-481: Alt-A loans should not be confused with alternative documentation loans, which are typically considered to have the same risk as full documentation loans despite the use of different documents to verify the relevant information. As with subprime mortgages, a greater portion of Alt-A mortgages tend to be originated by specialized lenders, rather than banks and thrifts. Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from
64-522: A borrower whose financial profile might not meet agency guidelines for the loan terms requested might still be eligible under Alt-A guidelines. Aside from the borrower's credit and financial profile, GSE standards are also generally the most stringent regarding how much of a given property type's value or purchase price is permissible to lend on owner-occupied , second ("vacation") and non-owner occupied ("investment") homes, and under what conditions. The combination of these property and occupancy factors with
96-500: A debtor chooses to default on a loan, despite being able to service it (make payments), this is said to be a strategic default . This is most commonly done for nonrecourse loans , where the creditor cannot make other claims on the debtor; a common example is a situation of negative equity on a mortgage loan in common law jurisdictions such as the United States, which is in general non-recourse. In this latter case, default
128-623: A fully private institution via legislation in 1995). The residential mortgage borrowing segment is by far the largest of the borrowing segments in which the GSEs operate. GSEs hold or pool approximately $ 5 trillion worth of mortgages. The U.S. Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts into circulation. This collateral
160-556: A given borrower's profile can move the loan out of the "prime" category of agency-conforming loans and into less stringent categories such as Alt-A and subprime. For example, Fannie Mae might agree to purchase all loans made by a particular lender on single family second homes in a particular area at a particular maximum LTV for borrowers within given income, asset and credit limits. Borrowers beyond those limits, or those seeking loans above that maximum LTV for second homes, would need to apply for an Alt-A loan. Borrowers still further outside
192-506: Is Greece , which defaulted on an IMF loan in 2015. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments. In the 1998 Russian financial crisis , Russia defaulted on its internal debt ( GKOs ), but did not default on its external Eurobonds . As part of the Argentine economic crisis in 2002, Argentina defaulted on $ 1 billion of debt owed to
224-518: Is Lehman Brothers , with over $ 600 billion when it filed for bankruptcy in 2008 (equivalent to over $ 830 billion in 2023). The biggest sovereign default is Greece, with $ 138 billion in March 2012 (equivalent to $ 192 billion in 2023). The term "default" should be distinguished from the terms " insolvency ", illiquidity and " bankruptcy ": Default can be of two types: debt services default and technical default. Debt service default occurs when
256-573: Is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities. Congress established GSEs to improve the efficiency of capital markets and to overcome market imperfections which prevent funds from moving easily from suppliers of funds to areas of high loan demand. This is primarily done by some form of guarantee that limits the risk of capital losses to those supplying funds. Presently, GSEs primarily act as financial intermediaries to assist lenders and borrowers in housing and agriculture. Fannie Mae and Freddie Mac,
288-666: Is colloquially called "jingle mail"—the debtor stops making payments and mails the keys to the creditor, generally a bank. Sovereign borrowers such as nation-states can also choose to default on a loan, even if they are capable of making the payments. In 2008, Ecuador's president Rafael Correa strategically defaulted on a national debt interest payment, stating that he considered the debt "immoral and illegitimate". Consumer default frequently occurs in rent or mortgage payments, consumer credit, or utility payments. A European Union wide analysis identified certain risk groups, such as single households, being unemployed (even after correcting for
320-474: Is to enhance the flow of credit to targeted sectors of the economy, to make those segments of the capital market more efficient and transparent, and to reduce the risk to investors and other suppliers of capital. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors: agriculture , home finance and education . Well known GSEs are
352-487: The Internal Revenue Service in order to verify the income on the application. The same documentation features are available under "subprime" guidelines, and similar ones may even be available under agency guidelines. Alt-A and subprime differ in that, generally speaking, an Alt-A borrower would have had a sufficient financial profile to qualify for a "conforming" mortgage, if only it weren't for one of
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#1732782925904384-498: The World Bank . In times of acute insolvency crises, it can be advisable for regulators and lenders to preemptively engineer the methodic restructuring of a nation's public debt—also called "orderly default" or "controlled default". Experts who favor this approach to solve a national debt crisis typically argue that a delay in organising an orderly default would wind up hurting lenders and neighboring countries even more. When
416-832: The Federal National Mortgage Association, known as Fannie Mae , and the Federal Home Loan Mortgage Corporation, or Freddie Mac . Congress created the first GSE in 1916 with the creation of the Farm Credit System . It initiated GSEs in the home finance segment of the economy with the creation of the Federal Home Loan Banks in 1932; and it targeted education when it chartered Sallie Mae in 1972 (although Congress allowed Sallie Mae to relinquish its government sponsorship and become
448-528: The US Virgin Islands). During the subprime mortgage crisis that began in 2007, Alt-A mortgages came under particular scrutiny. One problem associated with Alt-A loans is the lack of necessary proof or documentation needed to be approved for a loan. Thus, lenders may be inclined to suggest borrowers skew their incomes or assets in order to qualify for a larger loan; in the long run, the borrowers may turn out to be unable to afford their payments but
480-598: The borrower has not made a scheduled payment of interest or principal. Technical default occurs when an affirmative or a negative covenant is violated. Affirmative covenants are clauses in debt contracts that require firms to maintain certain levels of capital or financial ratios . The most commonly violated restrictions in affirmative covenants are tangible net worth, working capital /short term liquidity, and debt service coverage. Negative covenants are clauses in debt contracts that limit or prohibit corporate actions (e.g. sale of assets, payment of dividends) that could impair
512-597: The buyers of their securities offer them high prices. This is partly due to an "implicit guarantee" that the government would not allow such important institutions to fail or default on debt. This perception has allowed Fannie Mae and Freddie Mac to save an estimated $ 2 billion per year in borrowing costs. This implicit guarantee was tested by the subprime mortgage crisis , which caused the U.S. government to bail out and put into conservatorship Fannie Mae and Freddie Mac in September, 2008. Every GSE prospectus contains
544-520: The corporation's assets are used to repay the debt. There are several financial models for analyzing default risk, such as the Jarrow-Turnbull model , Edward Altman 's Z-score model, or the structural model of default by Robert C. Merton ( Merton Model ). Sovereign borrowers such as nation-states generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences. One example
576-458: The debtor defaults on any debt to the lender, a cross default covenant in the debt contract states that that particular debt is also in default. In corporate finance , upon an uncured default, the holders of the debt will usually initiate proceedings (file a petition of involuntary bankruptcy) to foreclose on any collateral securing the debt. Even if the debt is not secured by collateral, debt holders may still sue for bankruptcy, to ensure that
608-686: The factors mentioned above, whereas a subprime borrower would suffer from exceptionally weak credit, income or asset characteristics. However, in cases where borrower, property and loan characteristics meet agency guidelines especially well, Fannie's and Freddie's automated preapproval systems generally grant reduced documentation features automatically at no extra cost. More expensive Alt-A or subprime loans are not necessary for strong borrowers to expedite their applications. Aside from reduced documentation features, Alt-A guidelines usually also offer borrowers greater flexibility than agency guidelines concerning borrower credit scores, income and asset levels. Thus
640-436: The following text, or something virtually identical, in bold letters, and has since before the sub-prime loans were originated: "Neither the certificates nor interest on the certificates are guaranteed by the United States, and they do not constitute a debt or obligation of the United States or any of its agencies of instrumentalities other than Fannie Mae." Critics of the GSEs have challenged the "implicit guarantee" since before
672-413: The income, asset and credit limits might need to consider subprime financing—difficult to find as of 2008. Similar to Alt-A lending, the jumbo and super-jumbo categories generally use an amalgam of agency and Alt-A guidelines for borrower eligibility while allowing larger maximum loan amounts than those permitted by the GSEs (as of 2023, $ 726,200 for a single family home outside Alaska, Hawaii, Guam and
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#1732782925904704-406: The lenders still collect a hefty profit. Because Alt-A loans are also the financing of choice for most non-owner occupied, investment properties, as a class they represent a far greater likelihood of borrower default than conventional, conforming mortgages, since people are more likely to abandon a property in which they do not live than they are to risk losing their primary homes. As of 2008, there
736-418: The position of creditors. Negative covenants may be continuous or incurrence-based. Violations of negative covenants are rare compared to violations of affirmative covenants. With most debt (including corporate debt, mortgages and bank loans) a covenant is included in the debt contract which states that the total amount owed becomes immediately payable on the first instance of a default of payment. Generally, if
768-470: The risks associated with individual loans. This also provides standardized instruments ( securitized securities) for investors. Some of the GSEs (such as Fannie Mae and Freddie Mac ) have been privately owned but publicly chartered; others, such as the Federal Home Loan Banks , are owned by the corporations that use their services. GSE securities carry no explicit government guarantee of creditworthiness, but lenders grant them favorable interest rates, and
800-483: The significant impact of having a low income), being young (especially being younger than around 50 years old, with somewhat different results for the New Member States, where the elderly were more often at risk as well), being unable to rely on social networks, etc. Even internet illiteracy has been associated with increased default, potentially caused by these households being less likely to find their way to
832-533: The social benefits they are often entitled to. While effective non-legal debt counseling is usually the preferred -more economic and less disruptive- option, consumer default can end-up in legal debt settlement or consumer bankruptcy procedures, the last ranging from one-year procedures in the UK to six-year procedures in Germany. Research in the United States has found that pre-purchase counseling can significantly reduce
864-421: The standard of conforming, GSE-backed mortgages. An example of a person requesting a Stated Income mortgage is an individual with multiple and varying sources of income that would require an onerous amount of paperwork to document, such as income from self-employment or investments. Note that reduced documentation loans still require that borrowers authorize the lender to order their tax returns at random from
896-450: The sub-prime crisis. Default (finance) In finance , default is failure to meet the legal obligations (or conditions) of a loan , for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity . A national or sovereign default is the failure or refusal of a government to repay its national debt . The biggest private default in history
928-529: The two most prominent GSEs, purchase mortgages and package them into mortgage-backed securities (MBS), which carry the financial backing of Fannie Mae or Freddie Mac. Because of this GSE financial backing, these MBS are particularly attractive to investors and are also eligible to trade in the "to-be-announced," or "TBA" market. In addition, the GSEs created a secondary market in loans through guarantees, bonding and securitization . This has allowed primary market debt issuers to increase loan volume and decrease
960-506: The types of "conforming" or "agency" mortgages, ones guaranteed by the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac . There are numerous factors that might cause a mortgage not to qualify under the GSEs' traditional lending guidelines even though the borrower's creditworthiness is generally strong. A few of the more important factors are: In this way, Alt-A loans are "alternatives" to
992-553: Was a strong push for the FNMA and FHLMC to be permitted to buy more of them. However, the interest rates in this lending category increased substantially between 2006 and 2008 as a result of the shrinking secondary market . Government-sponsored enterprise A government-sponsored enterprise ( GSE ) is a type of financial services corporation created by the United States Congress . Their intended function
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1024-496: Was strong evidence of weakness among securities backed by Alt-A mortgages for reasons similar to the crisis in those backed by subprime. Because Alt-A loans were not primarily purchased by the GSEs, they thus became more expensive and much harder to find as a result of the general crisis in markets for mortgage-backed securities. Alt-A loans were still available from individual institutions which held them "in portfolio" rather than re-selling them to investors, and as of mid-2008, there
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