Expert: Subprime Lending Crisis to Spread to Alt-A Mortgage Sector Next

Dire as the bad credit Florida mortgage crisis already is, it’s likely to spread to a higher tier of home loans known as Alt-A.

That’s according to a respected economist affiliated with the University of California at Los Angeles.

“The question is to what extent,” David Shulman, a senior economist with the UCLA Anderson Forecast in Los Angeles, said. “That could be the next shoe to drop. Certainly, it’s a very reasonable concern.”

California is home to half of the 20 biggest U.S. bad credit and Alt-A mortgage lenders, which are also prevalent in Florida.

The deteriorating subprime mortgage industry has spawned a probe by the California Attorney General, Jerry Brown. Congress is considering regulations to tighten lending standards for such mortgages.

Subprime loans, a term applied to some of the riskiest Florida mortgage products, are typically made to borrowers with poor credit or extremely high debt burdens.

An Alt-A mortgage is made to people who are considered good credit risks, but who may lack documents needed to qualify for conventional loans.

UCLA Anderson Forecast dropped its forecast for housing starts this year to 1.33 million units from a previous estimate of 1.48 million units. Constructors broke ground on new homes at a 1.53 million rate in February.

Lawmakers have criticized the Federal Reserve and other bank regulators in recent weeks for allowing too many borrowers to get mortgages they couldn’t afford to repay.

Tom Marano, head of the mortgage business at Bear Stearns Cos. in New York, said on March 29 that he doesn’t see a significant risk of the subprime lending problem spreading to other parts of the home loan market.

Shulman disagreed.

“We suspect the problem in the [subprime mortgage] area is just the tip of the iceberg for the mortgage market as a whole,” he wrote.

UCLA Anderson Forecast is affiliated with the University of California at Los Angeles and is located at the UCLA Anderson School of Management.

SOURCE: Bloomberg News