The Alt-A Word

Mortgage Lender Alliance Bancorp Files for Liquidation.

Alliance Bancorp, a residential mortgage lender based in Brisbane, Calif., has filed for Chapter 7 bankruptcy and will liquidate its assets. The company listed assets and debts of more than $100 million each in its bankruptcy petition, which was filed Friday in Delaware.

In a Chapter 7 case, a trustee is appointed to liquidate a company’s assets. It differs from Chapter 11, which allows a company to protect itself from creditors and reorganize through a bankruptcy court.

Alliance could not be reached to comment. A letter posted on the company’s Web site said Alliance shut its doors Friday.

“Unfortunately the latest market was more than we were able to overcome,” the chief executive, Lisa Duehring, says in the letter. “We have exhausted our resources and do not have the means to move forward. Therefore, it is with great sadness that I announce that we have ceased operations as of today, July 13th.”

Is this more of the same subprime story? Not quite. Alliance Bancorp was an Alt-A lender. Has contagion now spread to Alt-A? That's what Kevin Depew on Minyanville was talking about in points 1 and 2 of Wednesday's "Five Things". Let's take a look.

1. Worthless!

Bear Stearns (BSC) yesterday afternoon told investors in two troubled hedge funds it manages that one fund was worthless and the other had only about nine cents remaining for every dollar invested following bad bets on the US subprime mortgage market.

• How fast can something like this happen?
• Snap your fingers. The two Bear Stearns hedge funds, worth an estimated $1.5 billion at the end of last year, were reporting stellar returns even as recently as this spring.
• Now, the net value of assets in in the High-Grade Structured Credit Strategies Enhanced Leverage Fund are zero, according to the Wall Street Journal.
• And the net value of assets in its other, larger, less-leveraged fund lost about 91%.
• The net-asset value represents the value of an investor's holdings after debts have been paid.
• Meanwhile, Bear Stearns, which last month said it would offer a $1.6 billion loan to shore up the more "conservative" of the two funds and help it sell its assets, nonchalantly reported yesterday that about $1.4 billion of the loan remains untapped, the New York Times said.
• So, in other words, it appears Bear Sterns was able to either sell or take down internally all the holdings of the funds at a level that wipes out customers, but leaves the firm fairly well covered. Sweet!
  

2. Worthlessness Now Spreading to Alt-A?

• What is this so-called Alt-A mortgage stuff about?
• Alt-A mortgages are loans where borrowers lack some of the documentation required by traditional mortgages.
• For example, if you are a salesperson with somewhat unpredictable income, but you have otherwise good credit, you may not be able to qualify for a traditional prime mortgage, but you're not subprime either.
• In that case you would fit into the Alt-A category; kind of a gray area between prime and subprime.
• The potential Moody's downgrades are important because other ratings agencies may follow suit; the result being additional bond downgrades triggering potential sales by funds that own the bonds and aren't allowed by charter or restriction to hold bonds in the portfolio below a certain grade.
• Oh yeah, and in a related story crossing the Bloomberg wire was this little nugget from Moody's: "Moody's Investors Service said it wasn't hired for 75% of the commercial mortgage-backed securities ratings assignments in the past few months because of its requirements for extra credit enhancements."
• In other words, issuers were and are "rate shopping." How does that work? Well, companies such as Moody's make money by being hired by issuers to rate bonds.
• Sort of the way some home appraisers develop reputations for being "generous" in their appraisals to help borrowers meet down payment requirements, for example, the ratings agencies are competitive in how they rate the bonds, some being a bit more "generous" in their ratings than others.
  

Given the blowup and bankruptcy of Alliance Bancorp, inquiring minds might be wondering how other Alt-A companies doing. Let's take a look at five Alt-A originators and one company (Luminent Mortgage Capital Inc.) that does not originate Alt-A mortgages but does buy them on the secondary market.

Click on any chart below for a sharper image.

AHM - American Home Mortgage Investment Corp



IMH - Impac Mortgage Holdings Inc.



IMB - IndyMac Bancorp Inc.



LUM - Luminent Mortgage Capital Inc.



FHN - First Horizon National Corp.



CFC - Countrywide Financial Corp.



Look to hear a lot more on the Alt-A word. Judging from the charts above, none of it will be any good.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/