Fannie Mae, the giant player in the secondary mortgage market where it buys loans and either keeps them in its own books or packages them for resale, just announced a hefty second quarter loss of $2.3 billion. A loss was expected but this was much more than what experts had anticipated. Anyway, that's one thing. The other is that this will result in some painful adjustments to its lending practices toward Alt-A loans.
Alt-A mortgage falls in between the prime and subprime products and is normally applied for by borrowers with a nice credit background but can't or won't disclose income or assets, or both. Now, Alt-A amounted to about 11% of Fannie Mae's mammoth portfolio of single-family loans, a whopping $2.7 trillion, by the end of June, 2008, and the killer is that almost half of the second quarter losses came from Alt-A alone. And that spurred company executives to action.
The changes start with an increase in fees for these mortgage loans Fannie Mae will buy in the future. That's a standard response nowadays when something like this happens. The fees can range from .25% to over 1.00% per home loan, depending on the down payment and the borrower's credit score and other criteria. The bottom line is that money is becoming more expensive for Alt-A. And come January 2009, Fannie Mae will cease buying them altogether. This will definitely take a decent share of liquidity out of the market, but won't necessarily wipe it out.
Alt-A's decline will hurt all sorts of buyers, as if they weren't squeezed enough already. Second and vacation home shoppers often liked to use Alt-A and now the remaining options they'll find on the market will become more expensive. People with generous tip income, like many in Las Vegas have, will also discover fewer choices and higher costs. As is obvious, the mortgage market continues to be volatile and that slows the nice recovery momentum everybody is looking forward to.