Alt-A: The Forgotten Segment of the Mortgage Market

retained by banks in their portfolios until they matured or were paid off. Securitization is a process by which mortgages (typically a large pool of mortgages) are used as collateral to issue securities, also known as mortgage-backed securities (MBS). Some mortgage securities are backed implicitly or explicitly by the U.S. government and are commonly called agency MBS. Such origination of mortgages and issuance of MBS is dominated by loans to prime borrowers conforming to underwriting standards set by the governmentsponsored agencies. Non-agency MBS issuance can be split into three broad categories—jumbo, Alt-A, and subprime. “Loosely speaking, the Jumbo asset class includes loans to prime borrowers with an original principal balance larger than the conforming limits2 imposed on the agencies High default rates on subprime mortgages marked the onset of the current financial crisis. Not surprisingly, both academic research and policy studies have focused their attention on the boom and subsequent collapse of the subprime mortgage market. However, the high incidence of defaults was not limited to subprime mortgages only; defaults have also risen rapidly in the other segments of the mortgage market—for example, the market for Alt-A (or Alternative-A) mortgages. But our knowledge of the Alt-A market is significantly less than our knowledge of subprime mortgages. This paper aims to fill this void. This study presents a brief overview of Alt-A mortgage originations with the goal of outlining broad trends in the different borrower and mortgage characteristics of Alt-A originations between 2000 and 2006. The paper also documents the default patterns of Alt-A mortgages in terms of the various borrower and mortgage characteristics over this period. We begin with a broad overview of the different segments of the overall U.S. mortgage market and their evolution over this period, with a special emphasis on the Alt-A mortgage segment.1 Since the 1970s, the principal structural change in the mortgage market has been the use of securitization. Prior to this, mortgages were 1 See Lehnert (2009) and Quigley (2006) for a more detailed overview. 2 Conforming mortgages satisfy balance limits and are typically securitized either with some form of explicit government guarantees (Federal Housing Administration/Veterans Administration [FHA/VA] mortgages securitized by the Government National Mortgage Association [Ginnie Mae]) or with implicit government guarantees (conventional mortgages securitized by the Federal National Mortgage Association [Fannie Mae] and Federal Home Loan Mortgage Corporation [Freddie Mac]). In contrast, the privatelabel market securitizes nonconforming mortgages, which include the jumbo prime, subprime, and Alt-A markets (for more details, see Fabozzi, 2006).