Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage

The Wall Street Journal reports:

Wall Street wants to bring back the “low-doc” loan.

These mortgages, which are given to borrowers that can’t fully document their income, helped fuel a tidal wave of defaults during the housing crisis and subsequently fell out of favor.

Now, big money managers including Neuberger Berman, Pacific Investment Management Co. and an affiliate of Blackstone Group LP are lobbying lenders to make more of these “Alt-A” loans—or even buying loan-origination companies to control more of the supply themselves—according to people familiar with the matter.

Years of easy-money policies by central banks and ultralow interest rates are pushing investors to seek out riskier assets with higher yields, such as these Alt-A loans. Many of these loans come with interest rates as high as 8%, compared with an average of about 3.8% for a typical 30-year fixed-rate mortgage. While such relatively high rates for Alt-A loans are attractive to investors, they have proved prohibitive to many would-be borrowers.

Banks have largely stayed clear of the market, putting small and medium-size lenders at the forefront of making these mortgages. Virtually none of these Alt-A loans are being sliced and packaged into securities. Instead, private-equity firms, hedge funds and mutual-fund companies are playing a larger role as buyers, placing the loans into private funds that are sold to institutional investors and wealthy clients.

An inside look at the next housing bubble.