FBR Predicts Surge in Alt-A Defaults

The credit performance of alternative-A loans is expected to tumble over the winter, with the default rate hitting 4% by the end of next May, up 45% from the current default rate, according to a Friedman Billings Ramsey report.The default rate on alt-A mortgages stood at 2.69% this past May after rising for 24 consecutive months. The FBR report says the performance of alt-A loans, which have higher credit scores than subprime loans, will "worsen relatively much more in the year ahead" than subprime and prime loans that are placed in private-label securities. "As the negative news about the mortgage and corporate debt markets became a tsunami last week, we updated our econometric models, and offer the following forecasts of the default rates of prime, Alt-A and subprime loans through May 2008," the Aug. 3 FBR report says. The default rate on "subprime loans should rise to 14.57%" in May 2008 from 12.4% in May of this year, while the default rate on "prime loans should rise to 0.53%" in May 2008 from 0.37% currently, according to the FBR researchers. (The default rate includes loans that are 90 days or more past due, in foreclosure, or real estate owned.)