What Is the Origin of No-Doc Mortgages?
Although there is no record of the first no-doc loan, they have grown from a practically unheard-of lending instrument to one of immense popularity from the mid-1990s until about 2005. Since that time, they have all but disappeared, as even conventional loans are difficult to obtain. No-doc loans that remain are at such high interest rates that they could be considered predatory loans. A no-doc loan stands for no-documentation loan, which isn't 100 percent accurate but pretty close. No-doc loans, as originally offered, required only a good credit rating and usually a substantial down payment. In the early 2000s to mid-2000s, until the real estate market plunged, no-doc loans were offered to those with less than good credit and often didn't even require a down payment.
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Paperwork Trade-Off
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Under terms of a conventional loan, the borrower would have to provide, at minimum, the following paperwork: a credit report, Uniform Residential Loan Application and Uniform Residential Appraisal Report. Also, a Verification of Employment or Self-Employed Income Analysis or Comparative Income Analysis (if self-employed), Verification of Deposit, Single Family Comparable Rent Schedule, a Transmittal Summary, a copy of the deed of your current home, federal income tax records for the past two years, Verification of Mortgage or Verification of Payment, a borrower's authorization and a purchase sales agreement.
No-doc loans only required your word on how much you earn and a credit score of 720 or above.
No-Doc Trade-Off
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In lieu of all the paperwork, the no-doc lender took your word and credit score as the basis for loaning you the money for a mortgage. (Plus a significant down payment when no-docs were in their infancy.) Because of the greater risk taken by the lender, no-doc loan interest rates were at least one to 1.5 points higher than conventional loans' rates. Often, a lender would be unwilling to undertake the entire risk itself, so a second lender (second mortgage holder) shared the risk.
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Why Lenders Would Do This
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It would appear lenders were taking quite a risk loaning substantial amounts of money (millions of dollars when it came to no-doc jumbo loans) on the word of a borrower, even a borrower with a good credit score. In fact, the lenders that offered no-docs were on the hook for very little because they typically didn't service the debt or even hold the mortgage. Lenders bundled the loans and sold them on the secondary market. They got their money back, with a slight markup, and the secondary market assumed the risk. Because of the true lack of risk, no-docs became extremely popular, and the requirements to obtain them were relaxed to the point where even people with bad credit (620 scores and less) could receive the loans.
Why People Took No-Doc Loans
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There are a lot of reasons to take a no-doc loan—some legitimate, some less legitimate, some outright criminal. For one, conventional loans are often difficult to obtain by self-employed individuals and those who earn money in bunches, like a stock speculator. Some people earn a lot of money in one year and little or none for several years thereafter but have earned enough to carry them through financially thin times. Some people are just peculiar about divulging so much private information with lenders they don't know. Some are hiding information because of taxes, and some are drug dealers or other kinds of criminals who can't show the sources of their income because of legal consequences.
The Story to 2010
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When the real estate market collapsed for a myriad of reasons (an unusually large number of no-doc loans among them), the federal government intervened and closed hundreds of banks and took over control of many more. Many more banks were given millions of dollars in 2009-10 under the federal “stimulus package.” But rather than loan the money back to potential borrowers, banks tightened up lending practices and used the money to put themselves back on sound financial footing. Conventional loans became very difficult to obtain, much less no-doc loans. Quicken Loans, among other lenders, says on its Web page that it no longer offers no-doc loans. While many Internet lending sites advertise no-doc loans, most offer them at interest rates so high that it may be considered predatory lending.
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References
- Photo Credit business man shaking hands in agreement image by Jorge Casais from Fotolia.com
