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Fear the Uptick in Risky Loans? It’s Nothing Like 2008

In 2018, the number of unconventional mortgages was less than 3% of the market; in 2006, they were 39%. And negative-amortization loans have all but disappeared.

NEW YORK – Housing analysts are hoping it’s not a case of déjà vu. Unconventional mortgage lending is on the rise, in 2018 reaching its highest level since the financial crisis of 2008. These mortgages include subprime loans, financing offered to borrowers with blemished credits.

While these riskier loans are on the rise, some economists shrug off the notion that the economy is headed for another mortgage meltdown.

Despite the uptick in these types of loans, the number of unconventional mortgages is still less than 3% of loans made in 2018. In 2006, for comparison, unconventional mortgages made up 39% of the market. Negative amortization lending, in which the balances on the loan grow, have generally vanished from the market.

And today’s unconventional mortgages aren’t quite as unconventional.

Guy Cecala, publisher of Insider Mortgage Finance, told Kiplinger’s Money Power that the unconventional mortgages of today aren’t quite as risky, in part because most lenders must make an effort to determine if a borrower has the “ability to repay” the loan. Lenders also may try to counter some of applicant risks, such as offsetting a high debt-to-income ratio, limited documentation, or interest-only loan with a high credit score and a large down payment.

The largest concentration of nonconventional loans in recent months has been among borrowers with limited or alternative documentation, such as the self-employed, those with debt-to-income ratios above 43%, and those desiring an interest-only loan, according to CoreLogic.

Lenders are also loosening up underwriting in some cases to add more mortgage business and distinguish themselves from competitors, Cecala says.

Source: “Unconventional Mortgages on the Rise,” Kiplinger’s Money Power (Nov. 12, 2019)

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