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Interest Rates Don't Matter for Non-Traditional Mortgage Lending

Non-traditional mortgage loans are, to be honest, kind of tough to define. They aren't, by the Federal Reserve's definition, subprime, but they're certainly not top quality, either. 

They include loans with interest-only features, hybrid adjustable-rate mortgages that backload the payments (so borrowers pay less the few first years and a lot more down the road). They include the low-documentation and no-documentation loans for which banks may not even bother verifying a borrower's stated income. 

Its pretty obvious these loans aren't necessarily of the highest credit quality, although in general the distinction between subprime and non-traditional is a lower credit score for the subprime borrower. And it's also this distinction that separates the mortgage businesses of various banks. Bank of America (NYSE: BAC  ) , for example, is comfortable originating a reasonable number of these non-traditional loans, while Regions Financial (NYSE: RF  ) tends to steer clear.

Interestingly, the traditional rules of supply and demand don't exactly fit these mortgage products. For a variety of reasons, the borrowers who apply for these loans haven't been affected by the run-up in interest rates we've seen in the markets over the past few quarters.

In the following video, Fool contributor Jay Jenkins breaks down the supply-and-demand dynamics in the non-traditional mortgage lending world, and he presents an argument that these types of loans could be a good hedging strategy if rates continue to rise.

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  • Report this Comment On November 10, 2013, at 11:05 AM, normgarry wrote:

    The "one size fits all" Mortgage strategy is NEVER going to work in America again. We've lost our manufacturing base. Our union jobs are drying up. Our older jobs are being replaced by lower-pay, part-time work. People can't even get real healthcare protections anymore.

    If the banks want to sell home loans, they are going to have no choice but to make Mortgage terms flexible and based on take-home pay... it'll be like they are RENTING you the house instead of selling it.

    Some people will scoff at me and say: "if they can't afford the home, they should be buying something smaller, or renting an apartment".

    Technically you are right, but the problem is that you'll see entire communities dry up and home values of homeowners who can afford their mortgages PLUMMET.

    Ultimately, if we don't address the trade-imbalances and lack of real jobs in America, you'll see welfare roles expand EVEN MORE. Our money is leaving with every single purchase and we aren't getting it back till a protectionist policy is adopted.

  • Report this Comment On November 10, 2013, at 5:13 PM, JohanStrauss wrote:

    I have no use for a mortgage. It would be nothing but an anchor around my neck.

  • Report this Comment On November 10, 2013, at 9:15 PM, Maudeth wrote:

    Dodd/Frank 2014 portions are decimating the small-bank sector. A VP at my local bank curses every time I ask about loans for rental property, because getting me to report my income the way they want is like playing Marco-Polo. It used to be that any loan < 100k was pretty much on a hand shake if you could show you could afford the payments, and the loan was collateralized properly.

    Ahh well, the good old days.

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