Fitch: Alternative Mortgages Pose Higher Risk

New mortgage products in the U.S. housing market may hold greater risk for borrowers and for financial institutions holding more of the new products on their balance sheets, according to Fitch Ratings.Alternative products such as interest-only, option adjustable-rate, and alternative-A mortgages are still low-risk assets, but they carry higher credit risk than traditional mortgages and could bring greater credit losses for banks and finance companies, Fitch said. "With higher-yielding assets gradually being replaced by lower [-yielding] ones, financial institutions have struggled to maximize net interest margin in the current low-rate environment," said Marc Yaklofsky, a director in Fitch's financial institutions group. "As a result, banks and consumer finance companies have retained a greater proportion of mortgage loans, especially alternative mortgages, on their balance sheets, particularly as commercial and industrial lending has been challenged." Increased credit risk from retained alternative mortgages will probably not have "a debilitating effect" on the stability of financial institutions, the rating agency said, adding that it will nevertheless look to capital levels and earnings diversification as "possible mitigating ratings factors." Fitch can be found online at http://www.fitchratings.com.