The potential borrowers that are most seriously disadvantaged today relative to the pre-crisis period are those who cannot adequately document their income. Before the crisis, they could select from a menu of alternative modes of documentation for a modest rate premium, but those alternatives are all gone. Full documentation is the rule today.
The insanity is that the full documentation rule goes well beyond the needs of risk control. Rather, it is an unfortunate consequence of hasty enactment of rules in the immediate aftermath of the financial crisis — a reaction to reports of borrowers being given loans they clearly could not afford.
While loans with less than full documentation will not be insured by FHA or purchased by Fannie Mae or Freddie Mac, lenders could make them very profitably at their own risk, but don’t. Why they don’t is the subject of a forthcoming article.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.
©2013 Jack Guttentag
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