Lost on subprime? Don't be fooled again with Alt-A

Such reassuring statements have been spewing forth from the mouth of Fed chair, Ben Bernanke, who said on March 28th, that the problem was limited to subprime. And last week, St. Louis Federal Reserve Bank President William Poole said that he expected the impact on the economy from problems in the subprime mortgage market would likely be contained. I believe that they are trying hard to convince themselves that it will all be fine.

But reality is at odds with their reassuring statements. For instance, The delinquency rate for Alt-A mortgages has doubled. In February, 2.60% of Alt-A loans were delinquent by 60 or more days, up from 1.22% a year before. By comparison, subprime, which is collapsing at a much higher rate, had 12.44% of its loans delinquent by more than two months, up from 7.84% a year before.

What does this mean for investors? If you owned American Home Mortgage Investment Corp. (NYSE: AHM), you already know. AHM lost 15.2% of its value yesterday after it announced it would earn less and pay out a smaller dividend because it was being asked to buy back and write down the value of its Alt-A loans. And last week, M&T Bank Corp. (NYSE: MTB), of which Warren Buffett owns 6%, announced that it would write down Alt-A loans and no longer sell them because bids for the mortgages came in lower than it had expected -- slicing $1.1 billion from its market value.

When I first posted about shorting subprime mortgage lender, NovaStar Financial (NYSE: NFI), I got a form of comment less polite than Bernanke's which was intended to dismiss my concerns. Here's one: "REIT accounting is complex and you do not understand it. NFI is well managed and its securitizations are well received. You are one of the bashers who uses mis-interpertation [sic] and failure to understand the basics of the business to join in. The people who short this stock (NFI) deserve what they get if they are stupid enough to follow your half-baked and mis-guided advice."

If you fell for that, I urge you not to be fooled again on Alt-A. Nor should it be a surprise if prime mortgages -- which defaulted at a 2.57% rate in the fourth quarter of 2006 -- start having bigger problems.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in American Home, M&T Bank, or NovaStar.