What is Alt-A Lending?

An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans.
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Characteristics of Alt-A

Within the U.S. mortgage industry, different mortgage products are generally defined by how they differ from the types of "conforming" or "agency" mortgages, ones guaranteed by the Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.

There are numerous factors that might cause a mortgage not to qualify under the GSEs' lending guidelines even though the borrower's creditworthiness is generally strong. A few of the more important factors are:

* Reduced borrower income and asset documentation (for example, "stated income", "stated assets", "no income verification")
* Borrower debt-to-income ratios above what Fannie or Freddie will allow for the borrower credit, assets and type of property being financed
* Credit history with too many problems to qualify for an "agency" loan, but not so many as to require a subprime loan (for example, low scores or serious delinquencies, but no recent charge-offs or bankruptcy)
* Loan to value ratios (percentage of the property price being borrowed) above agency limits for the property, occupancy or borrower characteristics involved

In this way, Alt-A loans are "alternatives" to the gold standard of conforming, GSE-backed mortgages.

A classification of mortgages where the risk profile falls between prime and subprime. The borrowers behind these mortgages will typically have clean credit histories, but the mortgage itself will generally have some issues that increase its risk profile. These issues include higher loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income.
Investopedia Says... These types of loans are attractive to lenders because the rates are higher than rates on prime classified mortgages, but they are still backed by borrowers with stronger credit ratings than subprime borrowers. However, with the higher rates comes additional risk for lenders because there is a lack of documentation - including limited proof of the borrower's income.

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What is subprime Crisis?

In Brief
Subprime Lending is primarily referring to loans extended to those with lower credit. It's considered to be much more riskier than Alt-A Lending.
Now that our economy is taking a hit(in the mortgage market), there's a very large amount of loan defaults on the SubPrime Loans(riskier loans), causing a problem across the Loan Market.
I personally believe that this whole situation will greatly affect the CPI(Consumer Price Index), causing inflation to appear lower than actual levels, due to many people who are downsizing housing expenses, at the expense of Lenders.


Explaination:-
The subprime mortgage crisis is an ongoing economic problem characterized by contracted liquidity in the global credit markets and banking system. An undervaluation of real risk in the subprime market is cascading, rippling and ultimately severely adversely affecting the world economy.

The crisis began with the bursting of the United States housing bubble[1][2] and high default rates on "subprime" and adjustable rate mortgages (ARM). Loan incentives, such as easy initial terms, in conjunction with an acceleration in rising housing prices encouraged borrowers to assume difficult mortgages on the belief they would be able to quickly refinance at more favorable terms. However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically, as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.[3]

The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments. Major banks and other financial institutions around the world have reported losses of approximately US$435 billion as of 17 July 2008.[4][5] Owing to a form of financial engineering called securitization, many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Corporate, individual and institutional investors holding MBS or CDO faced significant losses, as the value of the underlying mortgage assets declined. Stock markets in many countries declined significantly.

The widespread dispersion of credit risk and the unclear effect on financial institutions caused reduced lending activity and increased spreads on higher interest rates. Similarly, the ability of corporations to obtain funds through the issuance of commercial paper was affected. This aspect of the crisis is consistent with a credit crunch. The liquidity concerns drove central banks around the world to take action to provide funds to member banks to encourage lending to worthy borrowers and to restore faith in the commercial paper markets. The U.S. government also bailed-out key financial institutions, assuming significant additional financial commitments.

The subprime crisis has adversely affected several inputs in the economy, resulting in downward pressure on economic growth. Fewer and more expensive loans tend to result in decreased business investment and consumer spending. The initial leveling off in the housing market has become a downturn in many areas due to a surplus inventory of homes. The reduction and shift in demand versus supply has resulted in a significant decline in new home construction.[6]

With interest rates on a large number of subprime and other ARM due to adjust upward during the 2008 period, U.S. legislators, the U.S. Treasury Department, and financial institutions are taking action. A systematic program to limit or defer interest rate adjustments was implemented to reduce the effect. In addition, lenders and borrowers facing defaults have been encouraged to cooperate to enable borrowers to stay in their homes. Banks have sought and received over $250 billion in additional funds from investors to offset losses.[7] The risks to the broader economy created by the financial market crisis and housing market downturn were primary factors in several decisions by the U.S. Federal Reserve to cut interest rates and the economic stimulus package passed by Congress and signed by President George W. Bush on 13 February 2008.[8][9][10] Both actions are designed to stimulate economic growth and inspire confidence in the financial markets.

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