Recent Mortgage Fraud Developments and Future Outlook

Before we use to rely on automated underwriting systems and credit scores we had humans who would carefully underwrite mortgage loan files. During the caveman human underwriter days, loan originators and loan processors knew that underwriters could make or break a file. An underwriter had god-like power to grant or deny the American dream. They had minds like a detective and long-term memory capabilities of an autistic child who can recount the entire screenplay of The Incredible Journey along with all the background noises. Underwriters knew which loan originators had a history of submitting fake gift downpayment letters because they would all sit and chainsmoke together in an un-vented room for 9 hour straight comparing sob stories from loan originators whose files were denied. After work, they would saunter off to network with other underwriters from other banks at a local bar or Mortgage Banker’s Association meeting, same/same. Any fraud that a loan originator tried to pull off was easily sniffed out, with the LO retreating for a while and eventually leaving the company due to the ice cold group shun effect. There were no stated income loans. Two years of tax returns, a P&L and a balance sheet were brought in to underwriting and a few days later, an underwriter would hand the LO a sheet of paper telling the LO what number to use as income for qualifying purposes. If the newly self-employed could not qualify, that person found a co-signer, usually a parent.

Yes, I was an underwriter back in the mid 1980s, and I was the youngest underwriter on staff. I was recruited from processing because I use to submit my files already underwritten along with the conditions for loan approval. What was apparent to me even as a 23 year old was that if my boss had to report to the same person that was in charge of sales and production, every file would have been approved. But she reported to someone else. It was that person’s job to make sure we were making good credit decisions. The goals of production and risk are in harmony, if you take a long-term look at the possible consequences of making credit decisions that are too far out of balance either way. Each part of a mortgage company needs the other part to maximize good consequences for all.

[photopress:stated_income_1.jpg,thumb,alignleft]Recent Mortgage Fraud Developments

The outlook for mortgage fraud across the United States is grim. I started this series at the end of October with background research conducted by the FBI that concluded that the most damaging mortgage fraud consisted of many people in the industry working together; fraud for profit.

As of today, I am no longer convinced that fraud for profit is the most damaging kind of mortgage fraud.

Today I believe if we put all the out-of-work underwriters back to work and opened up all the loan files in the defaulting tranches of subprime, Alt-A, and prime loans, we would find the same kind of problems that Fitch, the ratings agency, found when they re-undewrote a small sample of 45 early default loans from the 2006 vintage. Now granted, this is a small sample. However, after working within corporations most of my adult life, I also know that the public really never hears how bad things are. The name of the report is “The Impact of Poor Underwriting Practices and Fraud in Subprime Residential Mortgage Backed Securities

Who is to Blame for the Subprime Meltdown?

Every day there’s another news story or blog post spreading more blame and anger about the mortgage market, increasing foreclosure statistics, the effects on our economy, fears of more layoffs in the mortgage sector and beyond, and so forth. With enough blame to go around, everyone keeps pointing fingers at everyone else. So far, here is who’s been blamed for the subprime meltdown/credit crunch/liquidity crisis.

  1. Mortgage brokers, for being rapacious capitalists;
  2. Loan originators, for having the audacity to wish for a six-figure income with no experience required;
  3. Loan officers who work at a bank, for knowing nothing and legally hiding their yield;
  4. Greedy wholesale lenders for enticing the brokers and relaxing the underwriting standards because of competition;
  5. Greedy Wall Street investors;
  6. Greedy Wall Street investment bankers;
  7. Incompetent Wall Street ratings agencies
  8. Greedy investors who just wanted to buy and flip;
  9. Realtors for threatening to pull business if the broker or lender did not approve their buyer’s loans;
  10. Realtors for pushing the sales prices up, up, up by continuing to add closing costs and more into the sales price, then threatening the appraiser when the home didn’t appraise;
  11. Real estate broker/owners, in their national conspiracy to keep commissions at 6%;
  12. Redfin, because it’s always Redfin’s fault;
  13. Zillow, for forcing loan originators to force appraisers to meet the homeowner’s expected Zillow zestimate or lose the refinancing client to a competitor;
  14. Unethical appraisers who turned in falsely inflated appraisals under threat of retaliation from mortgage brokers;
  15. Escrow closers for being a neutral, powerless, third party observer to the madness;
  16. Deceptive banner ad companies such as, nextag, etc. who are still advertising pay option, interest only, negative amortization loan products;
  17. Deceptive, bait-and-switch advertising from mortgage lenders in the mail and on the radio;
  18. Allen Greenspan for keeping rates low for way too long;
  19. Ben Bernake for not lowering interest rates RIGHT NOW, when Jim Cramer says so;
  20. State regulators for not properly supervising their licensees;
  21. Federal regulators for being altogether absent on a day-to-day basis in regulating RESPA, and the Truth-in-Lending Act;
  22. The Mortgage Bankers Association for having a huge war chest of lobbying dollars;
  23. The Nat’l Assoc of Mortgage Brokers for continuing to testify before congress and congressional committees that their members subscribe to a strict code of ethics, when nothing could be further from the truth. By the way, their website points consumers back to state regulators for “ethical complaints.”
  24. The media, because they keep running bad news stories, which are frightening homebuyers;
    The Community Reinvestment Act for forcing banks to make loans to non-whites;
  25. Republicans, for promoting homeownership;
  26. Democrats for promoting homeownership;
  27. Democracy for allowing political candidates to receive $210 million dollars in campaign contributions and lobbying dollars from mortgage banking trade groups and corporations;
  28. The consumer is also to blame for being irresponsible, failing to read the loan documents, falling for the zero down American dream story, and believing the LO when told “we can just refinance you into a fixed rate after you clean up your credit.

MILA shuts down

MILA, a subprime wholesale lender based in Mountlake Terrace, WA just north of Seattle, closed it’s doors Friday afternoon, leaving the remaining 100+ employees (down from 600 last fall) only 15 minutes to check their emails and clear out their desks. MILA had been making staff reductions as far back as February of 2006.

The Seattle Times reports that a potential buyer of the company spent a week wandering around MILA headquarters, but no deal materialized.

Real estate agents: Loans in process but not yet funded now must be resubmitted to other lenders. 

For your reading entertainment, here are a couple of articles from the archives. The ad on the left is promoting a pay-option ARM.

What Bubble?
Despite forecasts of gloom and doom, broker innovations have kept the future bright
Layne Sapp, Founder and CEO, MILA Inc.

Inc. Magazine
2005 Entrepreneur of the Year
Layne Sapp

Local Lending Company Soars
After Flying Under the Radar
Seattle Times Oct 2004

When MILA first started out here locally, they ONLY worked the hard money side of the business.  When subprime loan originations skyrocketed, so did MILA’s growth.  When the subprime market started to fold this spring, MILA ceased doing subprime loans and instead focused only on the Alt-A and Prime mortgage market. However, there is now tremendous competition for Alt-A and Prime loans.

I question whether or not the company had any duties to notify employees and the general public that they were running out of cash. On the one hand, the company owes duties to its shareholders and any potential buyer NOT to speak too soon about problems that may have a negative effect on the value of the company, especially if cash problems appear to be temporary. On the other hand, what about duties of good faith owed to the general public or to its employees? 

Your thoughts?

Professional Status: Perceptions and Reality

In part one of this series of blog articles about the subprime meltdown, I briefly sketched the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system.

Today’s part two will examine the structural relationship between a professional and his or her client.

Is your barista at Starbucks or the person who bags your groceries a professional? If you answer “yes,