Further loan deterioration seen for Alt-A market-S&P

By Nancy Leinfuss

NEW YORK, June 26 (Reuters) - Delinquency rates are rising for so-called "Alt-A" home mortgages held by U.S. borrowers who are rated above the subprime category but below the more pristine prime borrower, said Standard & Poor's in a report on Tuesday.

"Although the vast majority of Alt-A borrowers are making regular payments on their mortgage loans, there are strong--and growing--indications of deteriorating performance in the 2006 vintage," S&P said.

The rating agency said the percentage of Alt-A loans that are 90 or more days delinquent in 2006 is 2.5 times higher than the previous year's figure and more than 4 times that of 2004.

After 14 months, 90-plus-day delinquencies stand at 4.21 percent for 2006 Alt-A loans versus 1.59 percent for 2005 vintage and 0.91 percent for 2004 loans, it said.

Many Alt-A borrowers used the mortgages to refinance second homes or investment properties, but with U.S. home prices stagnating, and lending criteria being tightened, it will be harder for Alt-A borrowers to sell or refinance their mortgages.

S&P said the most disconcerting trend is how quickly the performance of these delinquent borrowers has deteriorated.

"We continue to see migration from 60-plus-day to 90-plus-day delinquencies within the 2006 vintage, suggesting that homeowners who experience early delinquencies are finding it increasingly difficult to refinance or work out problems, as opposed to being able to cure falling behind on payments," the rating agency said.

The expansion of credit parameters in underwriters' lending decisions was contributing to a riskier Alt-A homeowner profile, said S&P.

"We ascribe the higher levels of delinquencies in the 2006 vintage to the increasingly riskier credit profile of borrowers, characterized by an increasing proportion of highly leveraged homeowners who obtained their loans through limited verification of income sources and with little equity in their homes," the rating agency said.

About 33 percent of adjustable-rate loans in the Alt-A sector were originated with reduced documentation and a combined loan to value (CLTV) ratio of greater than 95 percent last year. CLTV is the percentage of the property's estimated market value that is represented by the combined total of the first and second mortgages on the home.

S&P said it will continue to examine the growing risk profile in 2006's Alt-A market, as compared with previous years and the impact of that increase on performance.

During 2006, lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers not only to subprime homeowners, but also to Alt-A homeowners.

"As underwriting standards have tightened in 2007 and rates of home price appreciation slowed or declined, indebted homeowners who experience financial trouble may have fewer refinancing options and may find it difficult to avoid going into foreclosure," S&P said.

An average Alt-A borrower has a FICO credit score of 700 to 715. FICO scores are a tool used to measure creditworthiness.

The rating agency said it will continue to analyze the creditworthiness of bonds in terms of performance of individual transactions and relative to their specific credit enhancement levels.