Today’s mortgage market, following the financial crisis, has some aspects of “insanity,” writes Mortgage Professor Jack Guttentag in a column this week.
Favoring borrowers with steady jobs despite risky qualities such as low FICO scores and high loan-to-value ratios and making it more difficult for those who are self-employed but have a much lower risk of default, this market is, “insane,” Guttentage writes, with the Federal Housing Administration continuing to insure loans with still-risky qualities.
Some borrowers are better off while others fare much worse as a result, he writes.
Low risk borrowers overall are made better off due to their ability to qualify yet under lower rates than prior to the recession. Yet moderate risk borrowers face relatively higher rates than previously and high-risk borrowers are largely shut out completely.
But looking at the market for private insurance, Guttentag writes, tells more of the story, with many transactions that would have qualified prior to the housing crash, but that cannot today qualify.
“The potential borrowers that are most seriously disadvantaged today relative to the pre-crisis period are those who cannot adequately document their income,” Guttentag writes. “Before the crisis, for a modest rate premium they could select from a menu of alternative modes of documentation, but those are all gone. Full documentation is the rule today.”
But documentation may be going overboard, he says, in terms of the risk control it is seeking.
“The insanity is that the full documentation rule goes well beyond the needs of risk control. Rather, it is an unfortunate consequence of hasty knee-jerk 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.”
Written by Elizabeth Ecker