Alt-A: Difference between revisions
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An '''Alt-A''' mortgage is a type of U.S. [[mortgage]] that, for various reasons, is considered riskier than [[A-paper|"prime"]] and less risky than "[[subprime lending|subprime]]," the riskiest category. Alt-A interest rates, which are determined by [[credit risk]], therefore tend to be between that of prime and subprime home loans. |
An '''Alt-A''' mortgage is a type of U.S. [[mortgage]] that, for various reasons, is considered riskier than [[A-paper|"prime"]] and less risky than "[[subprime lending|subprime]]," the riskiest category. Alt-A interest rates, which are determined by [[credit risk]], therefore tend to be between that of prime and subprime home loans. |
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Revision as of 21:04, 28 August 2007
An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than "prime" and less risky than "subprime," the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between that of prime and subprime home loans.
Categories of Alt-A
Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from the types of "conforming" mortgages that are guaranteed by the Government-Sponsored Entities (GSEs) of Fannie Mae and Freddie Mac.
There are at least three main traits of the borrower that might cause a mortgage not to qualify as conforming to the GSEs' standards:
- Stated income, a.k.a. lower documentation ("Low-Doc")
- No income disclosure, a.k.a. no documentation ("No-Doc")
- Not-owner-occupied (despite perhaps being Low-Doc of Full-Doc)
An example of a person preferring a Stated Income Alt-A mortgage is a tip-earner who may have no way to prove his or her income with bank statements.
Revaluation of risk
During the 2007 Subprime mortgage financial crisis, 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 borrowers may be inclined to lie about their incomes or assets in order to qualify for a larger loan; in the long run they may turn out to not be able to afford their payments.