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Wednesday, September 3, 2008

Beyond the subprime mortgage crisis: Alt-A loans

Sept 03 08
Alt-A mortgages were designed for people with good credit who could not document their income — people like the self-employed. Not as risky as subprime loans but not quite prime either, Alt-As are part of what’s causing trouble for Fannie Mae and Freddie Mac. About half of their combined $3.1 billion loss in the second quarter came from bad Alt-A loans.Part of the problem is that many of these loans, like the riskier subprime mortgages, went to people who never should have gotten them. Not self-employed, maybe not employed at all.

Now there are worries that Alt-A loans may cause another wave of defaults beyond the subprime mortgage crisis. Entrepreneurs who took out Alt-A mortgages may be hit when their rates reset -- jeopardizing their homes while the ailing economy is killing their businesses. Also, small business owners with good credit may not be able to get Alt-A loans because many people abused them by lying about their income and banks get nervous about lending to people who have trouble documenting their income.

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