Low document and stated income loans were wrongly blamed for the demise of housing in 2008. Like every loan type, there were some low document and stated income loans that did default, however, the majority of these loans are being paid in a timely manner, at the terms agreed upon. In reality, it is speculators, dishonest buyers and lenders and economic factors that are far more to blame for the housing economic distress.
Low document loans play a vital role in providing credit for business and housing. By definition, a low document loan allows borrowers to present limited paperwork but require higher credit scores and large cash down payments to qualify for a loan. Low document loans are primarily used by independent contractors and small business owners, the back bone of our country. They are the people who pay their bills but lack the consistent “paycheck” with a major corporation name on it. Independent contractors and small business owners make up a large portion of the employed population. Realtors, contractors, nurses, doctors, accountants, lawyers, financial advisors, athletes, musicians, programmers, sales people and consultants are all part of this community. Many of these people earn a good living yet they lack the “paycheck” to make them traditional borrowers.
The early 1980’s saw a push to create a country of independent contractors that lead many people to become entrepreneurs and start new businesses. Many large corporations employ independent contractors to lessen the company’s exposure to retirement and healthcare obligations, typically, independent contractor’s pay for their own healthcare, retirement, office expenses, travel and taxes. A corporation could eliminate much of the associated employment costs of salaried personnel by hiring independent contractors.
The recent change to lending practices by banks to stop making low document loans to qualified borrowers is partly the cause for the crisis we now find ourselves faced with. For years, lending institutions made big fees and enjoyed strong returns by making low document loans with most of these loans current or paid back in full. Without credit, housing markets and businesses can not properly function causing economic distress.
An important step to the recovery of housing and business is to reinstate low document loan programs that would allow for access to credit by non-traditional borrowers. We must move back to a more open and reasonable credit environment, bringing back into the market entrepreneurs and independent contractors to promote and revitalized the economy.
Low document loans play a very important role in our financial and business systems. Businesses rely on credit to build and grow. Without capital for business and home purchasing the market can not return to a normal and consistent cycle. The economy needs credit and borrowers to prosper and low document loans are a way to expand the and grow our economy.