Alt-A loans have been around a long time.  Back in the day, alternative documentation was allowed by Fannie Mae and Freddie Mac, but all it meant was that you could leave out the tax returns - you still had to provide the rest of the loan package.

Where did the Alt-A loans veer off-course?

As the lenders became more sophisticated, and the real estate market started cooking, three things developed:

1. Automated underwriting

2. Reliance on FICO scoring

3. Private label mortgage-backed securities

Because there was a voracious appetite on Wall Street for higher-yielding vehicles, the scramble began to process the loans quicker and easier.  Around 2001 or 2002 Countrywide and others began to accept and approve loans based on FICO score only, and no income documentation was required to get A-paper rates.  Normally, Alt-A loans paid a rate premium of 1/4% or more for the convenience of low-doc, but not any more. 

Then they bypassed Fannie and Freddie and sold these loans direct to Wall Street, bundled up to look like agency paper with the focus on yields, not documentation.

These loans are still available today. 

In yesterday's chart we saw that 83% of the Alt-A loans were low or no-doc, and as JMS correctly pointed out, that is the definition of Alt-A - a loan with alternative documentation.  The other 17% were full doc but must have had another kink, like a lower FICO score, that kept them from being a regular package.

Note that the average FICO score was 709 on the Alt-A loans, which is a decent score.  Borrowers who were cast into the Alt-A pool weren't necessarily bad credit risks - it has as much to do with the lenders wanting to hurry their loans to Wall Street as to why borrowers ended up as Alt-A.  I sent many well-qualified buyers to Countrywide because of the convenience of FICO-score-only underwriting, and they were getting A-quality rates, or very close, because the secondary market was so competitive.

In summary, just because a loan is in the Alt-A pool doesn't automatically mean worse-qualified borrowers - it means easier-qualified. 

The bigger concern is the type of loan - it's the resetting ARMs that will cause the bulk of the trouble over the next few years.  Today I added to yesterday's chart the mix of fixed-rate and adjustable loans.  There are 72% of the subprimes and 73% of the Alt-As that are adjustable-rate loans in California. 

It works out to roughly 31,691 subprime loans and 278,132 Alt-A loans that have yet to reset their adjustable-rate terms in the Golden State, using the NY Fed's numbers.

Here's another Alt-A reset chart through Jan. 2010, with this month circled: