Last month I discussed the evolution of the subprime industry and the events that shaped its growth over the last two decades. This month I examine the dramatic growth in the alternative-A mortgage sector.
Residential mortgage originations grew nearly 7 percent in 2005, according to Inside Mortgage Finance, largely as a result of strong growth in the nonconforming sector. The conforming and government sectors, on the other hand, lost market share, leaving them with only 38 percent of total originations--down from 46 percent in 2004 and 68 percent in 2003. Much of the erosion in market share in the conforming and government sectors has worked to the benefit of the alt-A market.
Although alt-A lending has been done for years by local financial institutions that kept the loans originated in portfolio without being labeled as such, alt-A lending really gathered momentum in the mid-1990s with the advent of risk-based pricing. This approach to pricing enabled lenders to stratify borrowers into various asset classes based on their risk profiles.
The alt-A segment was intended to cater to borrowers with healthy credit scores who could not qualify for conforming mortgages due to their inability to provide traditional documentation for their income and assets. Such borrowers included individuals who were self-employed or earned "cash incomes" and had the ability to mitigate some of the risk of limited documentation with large down payments.
The pioneers of the alt-A market during the mid-1990s were Novato, California-based GreenPoint Financial Corporation, a thrift; Pasadena, California-based Indymac, a real estate investment trust (REIT) that converted to a savings-and-loan in 2000; and Headlands Mortgage Co., a mortgage lender that went public in 1998.
Unlike their subprime counterparts that capitalized the residuals associated with their securitizations, these companies chose to securitize or sell the residuals along with the originations or simply hold these loans in portfolio. As a result, these firms were better insulated from the turmoil that hit the subprime industry from both the liquidity crisis of the fall of 1998 and the accounting write-downs resulting from aggressive capitalization of residuals. In 1999, GreenPoint solidified its position in the alt-A market with the acquisition of Headlands Mortgage.
It was not until 2001 that industry sources began to track alt-A as an individual asset class. Since 2001, the alt-A industry has grown...