The Return of Low Doc Loans

A return of low document loans can be a benefit to the economy in many ways.

Low document loans (or “low-doc” loans as they are known in finance) are loan instruments requiring less stringent evidence for income and ability to pay back the loan. These loans were all the rage in the 1990s and early 2000s before the current economic crisis. Lenders were handing out such loans like candy as a way of maintaining their balance sheets and passing much of the risk to holders of derivatives on Wall Street.

These low-doc loans have been seen as one of the keys to causing the market crash due to the extraordinarily high number of defaults that resulted from their use. Defaulters on these loans often had little chance of repaying the loan which resulted in the financial agencies holding the bag, derivative holders added more fuel to the fire of the rapid downward spiral into liquidation.

Today low-doc loans have become non-existent amongst lenders as a way of preventing another downfall. The irony of this is that the vast majority of those receiving low-doc loans before the economic crisis actually were financial responsible and made their loan payments on time! This was certainly fuel for much of the economic prosperity seen during the 1990s as adding vibrancy and robustness to the economic climate.

The problem was it only took a small percentage of those holding low-doc loans to drive financial institutions quickly down once they began to default.

So, a key to reinvigorating the economy may be for financial institutions to find a way to reinstitute low-doc loans and inject much needed capital into a struggling market.

Those who are self-employed or without regular income have special difficulties in getting loans even though the majority of them are capable financially of repaying the loan over time. Perhaps the days of renegade “open door” lending are over for good, but it has become obvious that a balanced approach may be more appropriate in seeking out responsible holders of loans.

It may be that many of the good aspects of low-doc loans such as loaning money to those who traditionally are discriminated against by the lending system, are necessary to bring back as a way of rebuilding the economy ~ only this time, only loan them what they can afford to pay back (novel idea), the bad aspects of little to no oversight can be reduced, to reduce the risk of another economic meltdown.

Author Jeff Hammerberg is the Founding CEO of www.GayRealEstate.com ~ Free Instant Access to the Nation’s Top Gay, Lesbian and Gay Friendly Realtors Coast to Coast.