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RISMEDIA, January 14, 2010—While the collapse of the U.S. subprime mortgage market has sparked a great deal of debate and study, a lesser known segment of the mortgage lending market is also under great duress due to a rapidly rising default rate, according to new research from the Federal Reserve Bank of St. Louis.

“The high incidence of defaults was not limited to subprime mortgages only; defaults have also risen rapidly in other segments of the mortgage market- for example, the market for Alt-A (or Alternative-A) mortgages,” said St. Louis Fed economist Rajdeep Sengupta. “But our knowledge of the Alt-A market is significantly less than our knowledge of subprime mortgages.”

Sengupta’s article, “Alt-A: The Forgotten Segment of the Mortgage Market,” delves into the workings of the nonprime Alt-A mortgage market, and examines trends and default patterns across different borrower and loan attributes. The article appears in the January/February 2010 issue of the Review, the St. Louis Fed’s bimonthly journal of economic and business issues.

Traditionally, Alt-A mortgages were made to borrowers with good credit who could not provide the full documentation necessary to qualify for prime loans. The subprime classification was designated for borrowers with incomplete or impaired credit.

Sengupta said that the summary data indicate a shift in Alt-A originations toward a greater share of owner-occupied properties, adjustable-rate products and cash-out refinances. Meanwhile, Alt-A lending expanded over time to include loans with progressively less documentation and lower borrower credit scores, while subprime loans on average experienced a slow but steady rise in average credit scores.

“Serious delinquencies on Alt-A originations rose sharply in 2006 and 2007, primarily for originations after 2003,” Sengupta said. “Even for originations of a later vintage, the defaults have risen across all attributes.”

When mortgage rates were low in the early 2000s, Alt-A loans represented only a small portion of the total market for mortgage originations. After 2003, with mortgage rates beginning to climb amid a time of appreciating home values, many homeowners seeking equity turned to the Alt-A mortgage market, Sengupta said.

“In short, the growth in nonprime mortgages after 2000 was fueled largely by households seeking to extract home equity during a period of rising home prices,” he said. “The share of borrowers using Alt-A products to extract equity in their homes almost doubled between 2000 and 2006.”