Just saw a press release from Standard & Poor’s last week on Alt-A issuance in the first quarter — in a word, surprising:
Issuance of bonds backed by Alt-A mortgages during the first quarter continued at high volumes, dipping only slightly from the record seen throughout 2006 despite the problems in the subprime market, Standard & Poor’s Ratings Services said in a recent report. … The total Alt-A issuance of $100.0 billion that Standard & Poor’s rated during first-quarter 2007 dipped 4.56% from the record $104.8 billion of fourth-quarter 2006, but it marked the fourth consecutive quarter of at least $100 billion. “Volume typically declines in the first quarter of a year due to seasonal factors, but this year’s decrease was far from the 24% drop during first-quarter 2006,” said Regina Bergeland, an associate director with Standard & Poor’s Residential Mortgage-Backed Securities Group. Compared with the slight falloff in first-quarter issuance, the decrease in the number of mortgage loans supporting this issuance is more pronounced. The quarter’s approximately 287,000 Alt-A mortgage loans represented a 14% drop in loans backing issuance compared with fourth-quarter 2006. The average balance of mortgage loans, however, increased to an all-time high of approximately $348,000. “This represents a 12% increase over the average of about $310,000 seen during all of 2006, and it supports the overall dollar volume of issuance,” said Bergeland.
Anyone seeing a trend here? (Hint: Institutional investors are gravitating towards larger-balance loans.) The reason strikes me as decidely blue-collar in its ethic — borrowers with a bigger mortgage, tied together with tighter lending standards, tend to possess significantly greater free cash flows than their smaller-mortgage-balance cohorts. And greater free cash flow, as any investor can tell you, means less exposure to the Very Bad Thing known as “early payment default.” Add in the current rising rate environment, and portfolio run-off due to prepayment velocity isn’t likely to be as big a threat throughout this year as it might have been in the past. Update: Forbes apparently took this to mean an Alt-A slowdown is imminent. While I agree that declining unit volume and increasing dollar volume is a classic indicator of a pending overall drop, I’m still surprised at the strength the market demonstrated in Q1. A good number of Alt-A originators hit the skids in March, but that didn’t drop Alt-A issuances off a cliff.