Alt A Loans
From FXPedia
An “Alt A Loan” is the short-form name for an Alternative Documentation Loan. These loans were originally developed for individuals unable to provide standard documents listing income levels and were intended primarily for self-employed and commissioned workers. In return for a lack of documentation verifying income and ability to pay as required for most unsecured loans, Alt-A loans usually carried a higher interest rate and required a higher credit score in order to qualify.
During the early 2000s, some institutions were found to be offering Alt A loans to individuals that clearly could not afford the loans. Because Alt A loans go through a manual assessment review with fewer checks than regular loans, lenders could process loans much easier and the flexibility of Alt A loans made it possible to qualify people that would have failed a regular application.
Ultimately, these loans were bundled into larger CDOs (collateralized debt obligations) and resold on the secondary market as investment grade securities in much the same manner as mortgage lenders did with subprime mortgages. When many of these underlying loans defaulted, the value of the CDOs dropped and helped contribute to the overall credit crisis facing financial institutions in the U.S. and other banking centers.
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