During the housing bubble, the mortgage industry came up with a lot of creative ways to give loans to people who couldn’t qualify for conventional mortgages.
After those loans caused the bubble to pop, lenders tightened restrictions.
Now, so-called “alternative documentation” mortgages are booming again. A new report from Fitch Ratings finds the volume of alt-doc loans being bundled into securities has doubled over the past two years.
A traditional mortgage application requires tax returns, pay stubs, and bank statements. Think of the alt-doc mortgage as a kinder cousin.
It’s for borrowers who, according to Marc Demetriou of Residential Home Funding, may not show income, but have assets.
“They have to have good credit scores,” Demetriou said. “They have to have good reserves, and they have to show good deposits go into their account, with not a lot of debt.”
Government regulators are paying a lot more attention to the alt-doc of today, he said. “They’re monitoring things a lot closer, what [lenders] can and can’t do.”
The research firm Inside Mortgage Finance found lenders issued $34 billion in alt-doc and other unconventional mortgages in the first three quarters of last year, up 24% on the year before.
Suzanne Mistretta, a senior director with Fitch Ratings, says she is concerned these loans could be a problem if the economy takes a turn for the worse.
“These borrowers may be at a greater risk of defaulting because their income wasn’t reliably estimated,” she said.