Fitch: Caution Despite Strong Alt-Doc Mortgage Performance

Fitch Ratings, New York, issued a report saying although alternative document residential mortgage loan products introduced in the US after the financial crisis have performed better than expectations, it maintain a cautious approach to these loans because of their limited history.

Fitch said the potential for adverse selection with alt-doc programs “adds uncertainty to how the loans will behave in a stressed environment.”

The report noted alt-doc loan volume has more than doubled in just the past two years in U.S. residential mortgage-banked securities, which includes Non-Qualified Mortgages, for borrowers who do not fit the credit box of Fannie Mae and Freddie Mac, government-sponsored enterprises, or ‘just missed’ qualified mortgage treatment to predominantly alt-doc loans.

Fitch Director Susan Mistretta said the agency currently applies significant probability of default penalties to the alt-doc programs, assuming they will behave similarly to, or worse than, the “stated income” products which were common prior to the financial crisis. Additionally, it increases projected loss severity to account for the potential for more challenges to foreclosure for those loan products subject to the Ability to Repay rule.

“Alt-doc loans performance to date has been strong even after taking into consideration the unusually supportive housing and economic environment experienced since the products were introduced,” Mistretta said. “Actual defaults to date remain well below lifetime expectations. The ATR rule combined with increased third-party due diligence and improved alignment of interests with issuers have all contributed to better than expected performance. Considering the lack of stress in the market since these loan products were introduced, Fitch will likely need to observe continued strong performance over a longer horizon before making any significant changes in its approach to the programs.”