Get Your Mortgage Rate Quote in Just 30 Seconds

Mortgage rates change every day, and your rate will vary based on your location, finances, and other factors. Get your FREE customized rate comparison below.

Unconventional Mortgage Loans Are Making a Comeback

Lenders Are Making It Easier to Get Loans, but a Repeat of the Housing Crisis Is Unlikely

The number of nontraditional mortgages reached its highest since the 2008 mortgage crisis. Unconventional mortgages consist of subprime loans, which are offered to borrowers with imperfect credit, loans issued to borrowers without a Form W-2 or other required paperwork, and other loans that do not follow Consumer Financial Protection Bureau criteria.

Does this imply a return to the terrible old days that contributed to the housing collapse? The editor-in-chief of Inside Mortgage Finance, Guy Cecala, believes that a surge in delinquencies might be a warning indication of an impending crisis.

Even while the number of unconventional mortgages has increased, they accounted for fewer than 3% of all loans processed in 2018, compared to 39% in 2006, just before the housing crisis. Cecala notes that many of the loans are unorthodox. Firstly, he argues, most lenders are required by law to make a good-faith attempt to evaluate a borrower’s “capacity to repay.” And lenders who underwrite these mortgages typically seek to mitigate risk. For instance, they will utilize a good credit score and a substantial down payment to reduce the risk associated with a high debt-to-income ratio, poor paperwork, or an interest-only loan.

Most of the subprime loans that contributed to the housing crisis are no longer in existence. Negative amortization loans have been eliminated, in which the loan balance increases rather than decreases. According to Cecala, interest-only loans have resumed their historic function as short-term loans for affluent individuals purchasing costly residences with a down payment of 50 percent.

According to CoreLogic, a financial data and analytics business, the major reasons borrowers took out unconventional loans in 2018 were because they had little or alternative paperwork, a debt-to-income ratio above 43%, or they want an interest-only loan. Self-employed or commission-based borrowers may need help proving their income, thus lenders may depend on bank records instead of tax filings. Younger borrowers, who may have student loans, and retirees with fixed incomes who spend more on housing typically qualify with a higher debt-to-income ratio.

A high proportion of dubious loans were securitized and sold to investors before the mortgage crisis. About $100 billion worth of non-agency mortgage securities were generated in 2018 (that is, mortgages not guaranteed by Fannie Mae, Freddie Mac, the Federal Housing Administration, or Veterans Affairs). This is the greatest increase since 2007, although it is still just 10% of what it was during the boom. According to Cecala, lenders may be more ready to relax underwriting standards to generate business, especially if doing so would set them apart from rivals. In the worst-case scenario, he argues, just a handful of lenders or investors will collapse.

Popular posts

7 Refinance Strategies
7 Refinance Strategies

Refinance to a lower interest rate: If interest rates have dropped since you took out your original mortgage, refinancing to a lower rate can help you save money on your monthly payments and reduce the overall cost of your loan. Refinance to a shorter loan term:...

7 Refinance Strategies
Is Refinancing With Your Present Lender Preferable?

Do Not Accept the First Refinancing Offer You Receive Homeowners should not accept the first refinancing rate provided to them. This is particularly important if you are applying with your existing lender. Some mortgage lenders have mechanisms in place that prioritize...


Don’t worry, we don’t spam

calculate your monthly mortgage payment

Related Topics

Helpful Links

Daily mortgage rate trends

Best mortgage lenders

First-time homebuyers programs by state

Loan limits by state

Types of mortgages

APR vs interest rate

Understanding PMI

Related Posts

No Results Found

The page you requested could not be found. Try refining your search, or use the navigation above to locate the post.