Alt-A

Quick quiz: Which of the following best describes Alt-A?

A) A short-lived accordion-based side project fronted by Eddie Vedder that produced one album in the late 1990s
B) A fringe group dedicated to re-ordering the alphabet
C) A now-defunct keyboard command that would automatically initiate an arbitration claim against Microsoft
D) Something to do with mortgage borrowers' credit quality.

Sadly, the answer is (D), though Eddie Vedder did have his ukulele phase...

Mortgage lenders sort borrowers into two main categories: prime and sub-prime. As you might guess from the way the names are constructed, prime borrowers are higher quality and sub-prime are lower quality.

Alt-A represents a space in between. The designation represents the middle ground of mortgage risk.

Prime borrowers are highly likely to make their house payment each month. Subprime borrowers are much riskier. Alt-A borrowers usually have most signs going for them that they will be able to keep up their payments, but with some red flags. Maybe the house they are buying is slightly more expensive than their income justifies. Maybe their documentation is incomplete for some reason.

The Alt-A borrowers will likely have to pay higher interest rates than a prime borrower would to make up for the lower credit quality. Also, they might not get approved by all lenders.