If the subprime meltdown spreads into higher loan classes, Los Angeles-area lending giants Countrywide Financial Corp. and IndyMac Bancorp Inc. stand to get hit by what one lending expert calls the "law of reverse gravity."
"With bad loan exposure, it's bottom-up instead of top-down," said Keith Corbett, executive vice president for Center for Responsible Lending.
"You got subprime on bottom and prime on top and there's this middle that will be hit, an area where bad loans in the subprime space may lead to not only defaults but tighter underwriting standards for Alt-A loans and perhaps upward."
So-called Alt-A loans are extended to borrowers whose credit scores fall short of prime but are above subprime. Los Angeles County is a center of the Alt-A universe, partly because of its large and diverse population of entrepreneurs, performing artists, independent contractors and others with decent but not-so-steady income. High property prices also push some borrowers who otherwise would be prime borrowers into Alt-A territory.
Both Countrywide and IndyMac are among the very biggest Alt-A lenders in the country. A small but significant portion of the outstanding loan portfolio of Calabasas-based Countrywide, the largest U.S. lender, is Alt-A. IndyMac of Pasadena, which originated $69 billion in Alt-A loans last year, has more than 70 percent of its loan portfolio designated as Alt-A.
"Over the last two years, the distinction between Alt-A and subprime has become even more blurry," said David Liu, mortgage strategy analyst for investment bank UBS AG. "Therefore the same types of problems, such as growing delinquencies, that plagued subprime loans are going to filter into the Alt-A market to a certain extent, and if you're a company in this area, you'll be affected adversely."
Don't call us subprime!
Countrywide and IndyMac recently have seen their stocks slide 21 and 41 percent respectively off their 52-week highs and have responded vehemently to news reports linking them to the subprime market.
Both companies point out that subprime loans are a small part of their respective loan portfolios.
IndyMac has been catching so much flak for being in the "subprime business" that it released a statement March 15 clarifying its "strong position as an Alt-A lender."
"Based on the definition of subprime established by the Office of Thrift Supervision for our regulatory filings," the statement read, "only 3 percent of IndyMac's $90 billion in mortgage loan production in 2006 was subprime."
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