Yes and no. I mean yes, there is a proscriptive world where we would tell people, 'sorry, you don't qualify' for reasons a, b and c. But there is also a world where those reasons mean that that tool is taken away from the poor, or at least the less financially savvy. Basically banks would turn more into an institution for people who have money and don't need a bank (financial institution).
Perhaps a middle ground could be requiring people taking out these kinds of loans to receive two hours instruction on the side effects of taking out these loans and delivered by a consumer advocacy group --but without advocacy bias. Let them make their decision at the end of the day and put a three day waiting period in there.
I'd argue that we lived in such a world until the 90s. When the big investment houses were partnerships with directors holding personal liability, they didn't pretend that 30% car loans were AAA paper. Dodgy car loans were often held by the dealer, and were sold for what they are worth -- pennies in the dollar.
And it isn't a tool for the poor, it's a funnel, draining wealth from people who don't have much to begin with.
There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans.
You'll only get into trouble if you fundamentally misestimate the default probabilities. This is true for any debt instrument, however, prime or subprime, fancy or vanilla.
> There is a fundamental difference between a 30% subprime car loan, and the senior tranch of a portfolio of them. There is absolutely nothing wrong with building AAA securities from subprime loans.
We made bad assumptions regarding default probability. Analysis of internal documents has been done - even the "pessimistic" estimates were far less bad than what actually happened. That would have been a problem regardless of securitization.
Securitization didn't fix this risk, nor was it meant to. Regulators allowed banks to satisfy capitalization requirements with senior tranches of other banks, but not with the senior tranches of their own portfolios. This isn't necessarily a terrible idea - it reduces local mispricing risk (i.e., one bank's underwriters suck), just not global mispricing risk (everyone sucks in the same way).
Perhaps a middle ground could be requiring people taking out these kinds of loans to receive two hours instruction on the side effects of taking out these loans and delivered by a consumer advocacy group --but without advocacy bias. Let them make their decision at the end of the day and put a three day waiting period in there.