“Now, big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP are lobbying lenders to make more of these “Alt-A” loans—or even buying loan-origination companies to control more of the supply themselves—according to people familiar with the matter…
…Years of easy-money policies by central banks and ultralow interest rates are pushing investors to seek out riskier assets with higher yields, such as these Alt-A loans. Many of these loans come with interest rates as high as 8%, compared with an average of about 3.8% for a typical 30-year fixed-rate mortgage. While such relatively high rates for Alt-A loans are attractive to investors, they have proved prohibitive to many would-be borrowers.”, Kirsten Grind, “Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage, The Wall Street Journal, February 2, 2016
“By having, post-crisis, the government banking regulators inappropriately ban these mortgages and the CFPB to in substance do the same, good and honest borrowers, many self-employed, either can’t get mortgages or have to pay exorbitant rates, relative to government-backed ones. I think that’s wrong and it not only hurts these Americans, but the economy as a whole.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage
Money managers lobby lenders to make more ‘Alt-A’ loans or even buy mortgage-origination companies to control more of the supply themselves
By Kirsten Grind
Wall Street wants to bring back the “low-doc” loan.
These mortgages, which are given to borrowers that can’t fully document their income, helped fuel a tidal wave of defaults during the housing crisis and subsequently fell out of favor.
Now, big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP are lobbying lenders to make more of these “Alt-A” loans—or even buying loan-origination companies to control more of the supply themselves—according to people familiar with the matter.
Years of easy-money policies by central banks and ultralow interest rates are pushing investors to seek out riskier assets with higher yields, such as these Alt-A loans. Many of these loans come with interest rates as high as 8%, compared with an average of about 3.8% for a typical 30-year fixed-rate mortgage. While such relatively high rates for Alt-A loans are attractive to investors, they have proved prohibitive to many would-be borrowers.
Banks have largely stayed clear of the market, putting small and medium-size lenders at the forefront of making these mortgages. Virtually none of these Alt-A loans are being sliced and packaged into securities. Instead, private-equity firms, hedge funds and mutual-fund companies are playing a larger role as buyers, placing the loans into private funds that are sold to institutional investors and wealthy clients.
Unlike some of the most egregious crisis-era loans, the new iterations require borrowers to show good credit and substantial assets or income, even if they can’t produce verification of annual wages. Still, there are no regulatory guidelines outlining what constitutes an Alt-A—or, officially, an “Alternative A”—mortgage, and each lender has its own requirements.
There has also been a rebranding effort: Most lenders prefer to call these products “nonqualified mortgages” due to the stigma attached to the Alt-A category.
By backing these loans, money managers said they would reach an underserved corner of the housing market: Borrowers who have good credit but might be self-employed or report income sporadically. In part because more Americans work that way, some money managers expect the market could increase to hundreds of billions of dollars each year, or more than 10% of the total mortgage debt outstanding.
New York-based Neuberger Berman and Pasadena, Calif.-based Western Asset Management, a division of Legg Mason Inc., are planning to roll out new private funds that invest in Alt-A mortgages in coming months, according to people familiar with the plans. Anup Agarwal, head of asset-backed securities at Western Asset Management, said he spends “a pretty good amount of time” traveling around the country to find lenders that aren’t only willing to make Alt-A loans but have the right set of borrowers.
“This is a pretty niche product, and the reality is it’s not easy to do,” Mr. Agarwal said.
Most mortgages in the U.S. are made to prime, A-rated buyers, according to strict standards for down payments, loan size and income documentation set by Fannie Mae and Freddie Mac, which buy the bulk of mortgages in the U.S.
Alt-A loans, which don’t require all those standards be met, gained prominence in the years leading up to the financial crisis, with lenders originating $400 billion at their peak in 2006, according to trade publication Inside Mortgage Finance.
Derided as “liar loans,” they were often extended to people who had no proof of income. By February 2010, about 26% of Alt-A mortgages were 90 or more days delinquent, up from 2% three years earlier, according to CoreLogic, a real-estate data and analytics company. That compares with conventional conforming mortgages, which saw delinquencies of 7.2% in February 2010, up from 1.4% three years earlier.
The generation of Alt-A loans has been minimal since then. Just $17 billion in Alt-A loans were originated in 2014, compared with $767 billion for conventional mortgages, according to Inside Mortgage Finance, which estimates that $18 billion to $20 billion were made in 2015.
Some lenders remain reluctant to jump in. Quicken Loans Inc., the second-largest consumer lender in the U.S. by mortgage volume, considered getting into Alt-A mortgages but decided against it because of the regulatory environment, said Bob Walters, the company’s chief economist.
“You put yourself at a higher level of risk, and we haven’t gone through this to see how it’s going to work out,” Mr. Walters said.
To drum up supply, Neuberger Berman executives have met with a handful of mortgage firms in recent weeks to try to form a partnership to make Alt-A loans, people familiar with the matter said.
Money managers want to bankroll the loans while relying on the mortgage firms to handle the process with borrowers, basically acting as a lender, “one step removed from the process,” one of these people said.
Rather than find lenders to make the Alt-A loans, Minneapolis-based alternative-asset manager Varde Partners Inc. last October bought a mortgage company that will do it for the firm.
The company likes “having control and visibility over the process,” according to a person familiar with the matter.
The efforts underscore a shift in how riskier mortgages are made and sold on Wall Street. Before 2008, large banks would generally make the loans then package them into bonds that they sold to investors.
That market shriveled after the crisis. The Dodd-Frank financial-overhaul law required some packagers of mortgage-backed securities to hold some of the loans.
In addition, Dodd-Frank creates a harbor for all mortgages that meet government guidelines. Any mortgages that fall outside those rules, such as Alt-A loans, are vulnerable to lawsuits from borrowers, which adds to the risk for lenders.
The money managers think that risk is manageable with rigorous underwriting, but it isn’t clear if borrowers are as enthusiastic about the revival of Alt-A loans.
W.J. Bradley Mortgage Capital LLC, a Denver-based mortgage firm, realized a disconnect last year when it began offering Alt-A mortgages and hard-to-finance loans to condo buyers for the first time.
After several months, the company had made no loans. Borrowers felt interest rates as high as 7% were too high, said Chief Operating Officer Dan Baruch.
The lender is trying again now that investor demand for the product has recently increased. It is in talks with investor partners to offer Alt-A mortgages with interest rates of about 5%.
“There’s capital on the sidelines ready to deploy, but the marketplace isn’t fully ready to accept it,” said Mr. Baruch.