November 12, 2019
During the 2008 economic recession and afterwards, “subprime” became a buzzword in general discussions about what led to the housing market crash.
That was for good reason. In 2004-2006, the years leading up to the crash saw as many as 20% percent of mortgages national were subprime. Most of them were adjustable rate mortgages from private lenders. In previous years, only about 8% or lower of the nation’s mortgages were subprime.
The housing market has been reshaped by the lessons learned from the mid-2000’s, but there is evidence that unconventional mortgages are beginning to make a comeback, according to Kiplinger’s Personal Finance.
Loans to borrowers with blemished credit have been on the rise, as well as loans to individuals without a Form W-2 and loans that don’t meet the standards of the Consumer Financial Protection Bureau.
But rising is a relative term. These unconventional loans comprised just 3% of market activity in 2018, compared to 36% in 2006. The practices leading up to the last crash have largely been eliminated, the report notes:
“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 role as short-term loans for wealthy people buying expensive homes with a down payment of, say, 50%…” —Guy Cecala, Publisher of Inside Mortgage Finance
Recently, unconventional loans have been provided mainly for those who have limited documentation, debt-to-income ratios above 43% or a justified need for interest-only loans with proof of ability to pay.
The growth in unconventional mortgages appears to be more a reflection of a strong housing market and low rates creating competition among lenders. While it’s something to keep an eye on, these loans are nowhere near approaching the levels seen prior to the crash.