Alt-A pioneer lays low as mortgage market seizes

NEW YORK (Reuters) - Peter Paul, known by some as the father of the residential mortgages market that bridges the gap between subprime and prime, is "hunkering down" as he watches the market he helped create dry up.

The predicament for the veteran mortgage banker is a far cry from how he imagined the market would develop as he worked with Bear Stearns Cos. BSC.N in 1996 to pool some of the first "Alt-A" loans into securities.

The partnership with Wall Street fueled growth of a market valued at $722 billion, with loan quality leaning perilously close to subprime in later years.

A rapid drop in investor demand for the loans due to soaring delinquencies and implosions at big lenders and hedge funds has forced Paul, 63, to revert to making loans one-by-one at his Paul Financial, LLC, with buyers lined up in advance.

The move is a shift from "bulk" transactions done with the confidence the loans could be sold in aggregate later on.

"We're hunkering down," said Paul from his office in San Rafael, California. "Instead of having six weeks inventory, we have six days."

Alt-A mortgages began as a sound idea while Paul was chief executive at Headlands Mortgage Co., before it merged with GreenPoint Mortgage, now the eighth biggest Alt-A originator.

Investors with large bank accounts or down payments are sometimes unable to document income in the way required by mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N), he said.

Lender "exceptions" to stretch guidelines for borrowers never caused problems in the buoyant housing market.

But the housing boom put prices of homes out of reach, so consumers reached further with riskier loans, he said. Wall Street banks were willing buyers of mortgages that were rapidly increasing in size relative to the price of the house or had no proof of income, attributes apparent in many loans gone bad.

The credit pullback "is happening quite fast and every day it's a little bit more," Paul said. "There's no appetite for any degree of risk."

About 5.8 percent of Alt-A adjustable-rate mortgages were delinquent by at least 60 days in June, up from 1.8 percent a year earlier, according to Credit Suisse. Subprime ARM delinquencies were close to 18 percent, compared with 7.7 percent in June 2006.

Wall Street in recent years also widened the band of acceptable credit scores on Alt-A loans to encourage more volume, clouding the definition between the sector and subprime. Alt-A scores that used to be in the 700s are now common in the mid-600s, near the 620-640 range at subprime lenders such as the bankrupt New Century Financial Corp.

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"People pushed the envelope a little bit, and nothing happened, so that became standard," Paul said. "Even if you don't want to (loosen standards), you're dragged kicking and screaming at least close to the flames."

Mainstream lenders including Wells Fargo & Co. (WFC.N) and Wachovia Corp. WB.N last week curtailed access to Alt-A loans, with the latter halting originations entirely. Lenders had already tightened standards such as eliminating loans that covered 100 percent of a home's value, a dangerous practice amid forecasts of falling home prices.

Opportunities for lenders arising from an "over-correction" by others may be apparent by year-end, Paul added.