Alt-A
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 even though the borrower's creditworthiness is of "prime" quality:
- 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 or 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.
Note that a Low-Doc or a No-Doc loan can also fall under another large mortgage category: "subprime." Alt-A and subprime differ in that, generally speaking, an Alt-A borrower would have had a sufficient credit rating (e.g., FICO score) to qualify for a "conforming" mortgage, if only it weren't for one of these ancillary characteristics of their mortgage application, such as low documentation.
In this way, Alt-A loans are "alternatives" to the gold standard of conforming, GSE-backed mortgages.
Revaluation of risk
During the 2007 subprime mortgage 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.