Prime Equity line of Credit

Commitment Prime Equity Credit line of credit line

N, who specialize in prime and near-prime loans, feel the pain. Vulnerability is creeping into higher-value US mortgages. There is a disturbing tendency, as the number of new "Alt-A" mortgage loans has risen strongly in 2006 and now accounts for 10-15 per cent of all US mortgage loans. While many Alt-A borrower used the mortgage to fund second home or asset refinancing, as US property values stagnate and credit requirements tighten, Alt-A borrower will find it more difficult to resell or fund their mortgage.

"Alt-A borrowers can have a massive homeowner line of credit that they continue to use to keep their first home loan current," said Josh Rosner, general manager of Graham Fisher & Co, an New York-based researcher. Defaults on Alt-A variable interest 2006 borrowings have approximately halved from 60 to 3.5 per cent of 2005 defaults of 60 to 3.5 per cent, while for sub-prime 2006 borrowings the 60 plus daily delinquency ratio is three time higher than for Alt-A borrowings.

As well as displacing tens of millions of homeowners, a broader restructuring of the US sub-prime residential property market could harm an even larger group of sub-prime home equity buyers. Enterprises such as American Home Equity Investment Corp. Those who specialise in prime and near-prime lending feel the ache.

Said the firm would provide more reserve due to increasing defaults on its Alt-A loan. The Group also reduced its 2007 dividends and earnings guidance, pointing to weak credit growth. According to sector analysts, loss rates for second mortgage or lien holders, such as home equity lending, are likely to be substantial.

"When a First Liz owner ends up with 30 to 60 per cent of the main unclaimed credit in a levy of execution, there won't be much for the Second Liz owner," Rosner said. Around 33 per cent of the variable-rate mortgages in the Alt-A segment originate from lower levels of documentary credit and a CLTV of more than 95 per cent last year.

The CLTV is the percent of the appraised value of the real estate value representing the sum of the first and second mortgage on the house. The Alt-A is unlikely to experience such a serious downturn as the sub-prime markets, said Mehmet Camurdan, a senior backed security investment fund management at Evergreen Investments in Richmond, Virginia.

There hasn' t been reaching the alerting sub-prime levels," he said. A typical Alt-A borrowing has a credit rating of 700 to 750 FICOs. Ficoscores are an instrument for measuring solvency. Old Bundesbank lenders in the lower category usually have a residual debt exposure (FICO) rating that ranges from 680 to 690.

Old B's usually have a CLTV share of between 75 and 90 per cent, according to marketing analysts. "Although the Alt-A obligor tends to have a higher FICO rating due to lower document requirement and the sometimes high level of credit risk of the obligor, we see an increase in Alt-A pool losses," said Tom Reese, VP of Asset Liability Management at Hartford Investment Management Co. in Conecticut, and referred to the groups of exposures grouped into a Mortgaging Backed Securities (MBS) or Collateralised Debt Bond (CDO).

Alt-A's vulnerability is mirrored in the MBS and CDO markets. UBS Securities reported that US Treasuries on Alt-A junior debt issuance margins, which were very narrow in the first half of February, rose sharply in the second half of the year. The Alt-A fixed-interest security valuation "BBB", which was trading at a 250 bp margin over Treasuries, is now quoted at 425 bps.

This effect is even more pronounced in the variable-rate mortgages (ARM) markets, where sub-order thresholds are generally higher than for fixed-rate mortgages, which means that the investor has less certainty. Margins on ALT-A offerings supported by hybride rating agency BBB rating agencies have increased by 100 bps and are at least 225 bps on BBB offerings, UBS said.

Further information on the sub-prime markets can be found at [ID:nN16195443].

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