FBR Sees No Fallout from Alternative Documentation.

Arlington, VA -- A report from Friedman Billings Ramsey & Co. here said adjustable-rate subprime mortgage loans with alternative documentation perform better than their counterparts with full documentation.

The report from Michael Youngblood and Jason Hu found that one in three subprime borrowers prefer an alternative-doc mortgage to a full-doc one. Furthermore, they prefer ARM loans by a vast majority. Nearly 85% of the subprime alternative-document loans originated in 2005 were ARMs. Over 96% of both the alternative- and full-doc loans originated in 2005 were indexed to Libor. The weighted average coupon of alternative-doc loans is 7.22%, compared with 7.04% for full-doc loans.

The average loan size for the alt-doc loan is $177,355, "substantially larger than the average full-documentation loan ($148,415)," the report said. Alt-doc loans have an average credit score of 640, compared with 618 for full doc, while loans with a credit score of 580 or less represent 16.9% of alternative, but 27.1% of full-documentation loans. However, the average loan-to-value ratio of alternative is slightly lower than that of full-documentation loans, 80.8% and 82.1%, respectively.

What the authors see as a major negative is the geographic concentration of the alt-doc subprime loans, with over 45% of them in the 42 metropolitan statistical areas considered to be in a housing bubble. Still, the report declares, "The higher credit scores and lower loan-to-value ratios of loans with alternative documentation should foster superior credit performance."

In the report's ...