In 2018, the number of unconventional mortgages increased to the highest level since the mortgage meltdown in 2008.
Unconventional mortgages include subprime loans, which are made to borrowers with blemished credit; loans made to borrowers without a Form W-2 or other standard documents; and other loans that don’t meet the standards set by the Consumer Financial Protection Bureau .
Does that mean we’re headed back to the bad old days that led to the housing meltdown? Probably not, although if there’s a rise in delinquencies, it could signal trouble ahead, says Guy Cecala, publisher of Inside Mortgage Finance.
While the number of unconventional mortgages has grown, they were still less than 3% of loans made in 2018, compared with 39% in 2006, right before the housing bust began. In addition, many of the loans are only slightly unconventional, says Cecala. For starters, most lenders must, by law, make a good-faith effort to determine that a borrower has the “ability to repay,” he says.
And lenders that underwrite these mortgages usually look for ways to offset risk. For example, they’ll use a high credit score and a large down payment to offset the risk of a high debt-to-income ratio, limited documentation or an interest-only loan.
Most of the bad-apple loans that contributed to the housing crisis are long gone. Loans that result in negative amortization — the loan balance grows rather than shrinks — have disappeared. Interest-only loans have returned to their traditional…