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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