Sub-prime mortgage providers in this country are teaming up more and more these days with unregulated rivals to sidestep rules designed to clamp down on risky lending.
The result of these partnerships are so-called "bundled" loans, which pair a primary mortgage with a second loan from unregulated groups called Mortgage Investment Corporations (MICs).
The arrangements have grown in frequency as regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.
The practice has grown fast because it allows borrowers to make down payments of just 10%, dodging federal rules that require either 20% or 35% down on mortgages not backed by government insurance, according to industry experts. Packaging two loans together allows the regulated lender to skirt those rules.
The rise of bundling reflects declining affordability after a long run-up in home prices, and could present a danger of defaults should prices fall. Such high loan-to-value mortgages are common when housing markets are about to implode
However, a spokesperson for the Office of the Superintendent of Financial Institutions says bundled loans do not violate any laws. Primary lenders are expected to take the extra debt from a second loan into consideration when evaluating the borrower's ability to afford the primary mortgage.
In a statement, the Federal Finance Department said it was monitoring co-lending activity, which it said represented a small portion of the mortgage market. It declined to comment on whether the practice had increased as an unintended consequence of tighter lending rules introduced last year.
