What's catching Wall Street's eye these days? Home loans to small- business owners and others who have good credit but lack conventional documentation-like pay stubs-to prove it.
These so-called "alternative A loans" are increasingly being packaged into securities and sold to ready investors, said Linda Lowell, research vice president at Credit Suisse First Boston in New York.
"These loans are an important, growing part of the nonagency mortgage- backed securities market," Ms. Lowell said. "This is a way for lenders to build volume in a good niche."
Investor acceptance of alternative A's could bode well for the mortgage industry, which has been testing new products to counter narrow margins on conventional loans.
Right now, alternative A loans account for less than $20 billion of the industry's more than $700 billion of annual originations.
But Ms. Lowell and others see plenty of opportunity for growth. Norwest Mortgage Inc., for instance, is making alternative A loans part of a program to build business through its in-house conduit, said Jim Svinth, senior vice president at the Des Moines lender.
Alternative A loans are so named because they closely resemble A-quality loans made to borrowers who meet criteria set by Fannie Mae and Freddie Mac.
The alternative products serve borrowers who have good credit but because of special circumstances don't satisfy standard underwriting requirements. For instance, some of these borrowers aren't salaried or have most of their assets tied up in a business.
The loans, which average $185,000, are typically priced 85 to 145 basis points above conventional mortgage rates even with their relatively high credit quality, making the new products appealing to lenders.
Investors like these mortgages as well because they prepay in a way that supplies steady cash flow-and fewer surprises, Ms. Lowell said.
The volatility of prepayments has been a major drawback of some types of mortgage investments.
Ms. Lowell has the background to spot potential winners. She has spent more than a decade tracking trends in the mortgage industry for Smith Barney Inc., Drexel Burnham Lambert, and before joining Credit Suisse last week, PaineWebber Inc.
Her area of expertise is collateralized mortgage obligations, or CMOs- securities that are created by pooling similar mortgages and then cutting them into tranches, or pieces, that carry different interest rates and maturities.
At Credit Suisse, Ms. Lowell said, she will continue looking into alternative A and other mortgage products to spot opportunities for the firm's investors and traders.
In her role as analyst, Ms. Lowell fits into the expansion that Credit Suisse envisions in the mortgage securities business, said managing director Patrick Coleman.
"It's very important that we have a credible research department," Mr. Coleman said. "It benefits investors and adds to our ability to sell more bonds."
