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Why the Alt-A Originate-To-Sell Mortgage Business Model Could No Longer Be Viable in a Declining Real Estate Market

August 29, 2007

Analysis of:Some Banks Better Positioned Than Others to Survive Mortgage Fallout | biz.yahoo.com

Alt-A Mortgage Sector Strategist (Robert Eng, CEO Strategist Network) says, “the Alt-A originate-to-sell mortgage business model might not be viable in a declining real estate market.” There are three main reasons for this. 1) Alt-A (stated income) loans may tend to contain areas of inaccuracy or misrepresentation that could justify a repurchase demand if firmly pursued by the investor. 2) For loans which originators sold to Wall Street investors but are later asked to “repurchase” or “buy-back,” the loss severity grows essentially linearly and at the same magnitude with the fall in collateral value. 3) Current squeezed margins at 1% are potentially inadequate to cover origination costs, sales commissions (to brokers, correspondent lenders, and Account Executives), and especially, future repurchase claims from investors who purchased loans. Please send an email or call for more detailed info & advice. Ultimately, this Alt-A originate-to-sell business model destroys value.

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