It's all over the news this week. Bad credit mortgages and home equity loans may be coming back, and they may be doing it fairly soon. The reason? Investments backed by prime grade mortgages are paying next to nothing, largely because the Federal Reserve has been working to keep mortgage rates artificially low to stimulate the economy. So investors have gone looking for bonds with better yields and have been snapping up those backed by subprime or bad credit mortgages, home loans that were considered untouchable a few months ago. In fact, prices in these bonds have roughly doubled since bottoming out a couple of years ago.

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Investors: The top of the food chain

When the mortgage crisis was at its worst, mortgage rates for any loans without government backing went through the roof. Jumbo mortgages, long considered safer because these borrowers had bigger down payments and better credit ratings, were hard to find and rates were about 2 percent higher than those of loans backed by FHA, Fannie Mae, and Freddie Mac. Bad credit mortgage lenders left the business altogether.

But today, jumbo mortgage pricing is attractive and loans are not hard to find because investors are buying them again. And investor demand for bad credit home loans will cause these mortgages to be made available too. According to The Atlantic, it's already happening. "Some investors are broadening their subprime bond exposure and some risky mortgages are being originated," the magazine reports.

Bad credit home loans: What they may look like in 2011

And why shouldn't they make a comeback? Subprime mortgages had been around for decades before the real estate crisis. However, they are likely to take a different form than those that some say caused our current economic woes. You won't see mortgages with no down payment requirement for people with bad credit, and you won't see 100 percent mortgages for people who can't prove their income. What you will likely see is a return to the more prudent standards in effect before lenders got silly. Here is a typical credit grading matrix from a large subprime lender:

Credit History A A- B C C- D
 





Mortgage delinquency last 12 months (days) 0 x 30 1 x 30 2 x 30 1 x 60 1 x 90 2 x 90
Foreclosure > 36 months > 36 months > 36 months >24 months > 12 months > 1 day
Bankruptcy (Ch 7) Discharged > 36 months Discharged > 36 months Discharged > 36 months Discharged > 24 months Discharged > 12 months Discharged 1 day
Bankruptcy (Ch 13) Discharged > 24 months Discharged > 24 months Discharged > 24 months Discharged > 18 months Filed > 12 months Filed
Debt to Income Ratio Max 50% Max 50% Max 50% Max 50% Max 50% Max 50%

The credit grade effects the mortgage rate that you are offered and how much you'll pay for it. It also determines how much you'll qualify to borrow. Maximum loan-to-values back in 2006 were as follows: A: 100%, A-: 100%, B: 90%, C: 80%, C-: 70%, D: 70%. I'd expect these loan-to-value ratios to drop by at least 10% across the board when subprime mortgage return in full force. American lenders may repeat their mistakes, but they won't do it any time soon.