The implosion of the Alt-A mortgage-backed securities market

Luke Woodward and Sudhakar Raju

Journal of Risk Management in Financial Institutions, 2009, vol. 2, issue 2, 214-225

Abstract: While the demise of the subprime mortgage-backed securities (MBS) market has received a great deal of attention, the implosion of the Alt-A MBS market has so far received much less attention. As recently as June 2007, annual issuance of Alt-A backed securities exceeded issuance of subprime-backed securities. The outstanding amount of Alt-A securities poses a significant systemic risk that is already becoming evident. This paper identifies the underlying causes for the deterioration of Alt-A MBS pools. While the deterioration in the subprime mortgage market was caused by lending to borrowers with poor credit, the Alt-A crisis was caused by lending to borrowers with fairly good credit who assumed excessively speculative, leveraged positions in overvalued housing markets. The paper applies value-at-risk to demonstrate that Fannie Mae's capitalisation was completely inadequate given the size of its subprime and Alt-A portfolios and its underlying loss expectations. As many of the Alt-A loans are adjustable-rate mortgages that will reset in 2009 and are moreover concentrated in the most overpriced housing markets, even more delinquencies and write-offs of Alt-A securities are in the offing.

Keywords: Alt-A mortgages; mortgage-backed securities (MBS); collateralised mortgage obligations (CMOs); asset-backed securities (ABS); value-at-risk (VAR); subprime mortgages; structured finance (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2009:v:2:i:2:p:214-225

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