S&P releases reports on jumbo, subprime & Alt-A trends
By SAM GARCIA
4/11/2005

While jumbo mortgage production is expected to fall this year, the fastest growing sector last year -- Alt-A lending -- shows no signs of fading. And some Alt-A growth is expected to come at the expense of subprime business.

According to three Trends in U.S. Residential Mortgage Products reports from Standard & Poor's, the volume of prime jumbo mortgage originations and loan securitizations is expected to decline 30% during 2005.

Rising rates are expected to drive overall mortgage activity down 15% to 20% this year, S&P said. But jumbo loan originations and issuance volume is expected to take the brunt of the hit -- falling from $225 billion in 2004 to $160 billion in 2005.

Subprime issuance of $301.5 billion last year almost doubled the total issuance for 2003, according to the reports, but could be on its way down this year.

Developments that could push down subprime activity include a change in the appetite for subprime issuance by Fannie Mae or Freddie Mac -- which S&P reports purchased 43.7% of the total subprime issuance last year, and a loss of retention from the increasing use of subprime interest-only products.

"Moreover, the market for subprime mortgage securities is experiencing significantly more demand than availability for many issuances," said S&P Director Scott Mason. "Thus, in the unlikely event that the agencies were to decrease their purchases of subprime mortgage-backed securities, the other active subprime investors would more than cover this void."

At the same time, S&P expects rising rates won't hurt Alt-A originations because of mitigating factors such as "traditional subprime borrowers trading up in credit; prime lenders looking for other nichees; and the continued increase in alternative document loans."

The ratings agency said the Alt-A market "was the fastest-growing sector in the RMBS market in 2004, leaping more than 137% from 2003" and well above the subprime sector's 88% increase during the same period.

S&P cited the introduction of Alt-A interest only loans and the continued use of "verbal verification" or "no-documentation" loans and investor property loans among predominant factors in the sector last year.

S&P said it rated approximately $142 billion in Alt-A transactions during 2004.

Article © MortgageDaily.com All Rights Reserved