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
Excellent post Jillayne. Loved the pic too! 🙂
Will be great to get back to a state of ‘normalcy’ when the bank actually holds the note and 20% down back in style.
Hi synthetik,
Thanks for your comments. I can’t take credit for the pic. Lance from Virginia sent it to me several months ago and I’ve been waiting for just the right blog article.
There’s an article in this month’s edition of ethix.org magazine in which the CEO of Homestreet Bank is interviewed. Their company decided to pass on originating subprime loans and he explains why here.
http://ethix.org/article.php3?id=396
Long term returns for shareholders might work for a privately-held corporation but I’m not so sure it would work for publicly traded corporation. What do you think?
Good article Jillayne!
However, I’m not very enthusiastic about a manual underwrite. I really like Fannie Mae automated underwriting system because I can tell my borrower that they are legitimately “approved with conditions” in 15 mintues – 30 minutes. However, at the same time, there needs to be a little bit more “interest” in every loan file, if that makes sense. Maybe we should have something that allows the broker/banker to communicate quickly and effectively with their customer, but also provides something like a QC ‘pre-audit’….
Thoughts?
Jillayne,
I think you’re right; I doubt any publicly traded company could have avoided this mess as the need for constant growth is forever there. “Grow or die”.
I read his comments and while it sounds great, I wonder if his company were into other financial instruments. “Subprime” is just a tiny piece of the puzzle as you know and has become an evil word in the media.
We know that all lending is in deep do-do right now and I suspect that even a privately held company such as HomeStreet probably engaged in some funky loans.
I could be wrong…
Hi David,
Sure. Low LTV, traditional 30/15 year fixed, wage earner, good credit score = fast preapproval.
High LTV, little cash reserves, unstable job history, self employed, marginal credit history = manual underwrite.
Then: Subprime = shove them into a stated loan and close the deal.
Now: FHA and conforming = a more careful consideration of the borrower’s ability to repay.
This will translate into banks and lenders being able to compete based on friendly, service-oriented underwriting departments that work in tandem with sales to figure out ways to make loans (not decline them.)
Realtors ought to be prepared to add more time into the financing contingencies for loan approval, if loan approval is what they want, and not just a “prequalification,” OR homebuyers should have secured credit approval (and not just prequal) from a bank or lender before making an offer.
so . . . . .
like I am so confused now, Jillayne.
Does this mean that buyers now have to have a down payment, a job, and good credik to get them a loan???
This seems so unfair after all these years 🙁
I know, Phil. What a shock to the system for those who entered the industry between the last 7 to 9 years. How’s the Boise market holding up?
66% Occupancy fraud
Does that imply that at least 66% of the mortgages were made for investment purposes and not as a primary residence? I had no idea that the investment:residence ratio could be so large.
Alan,
I read that as 66% of the 45 loans that defaulted, or 30 or so of the loans, which is likely a very small percentage of all loans made including the ones that didn’t default.
Seems it is not a high investment:residence ratio as much as a statement that a high percentage of loans that are defaulting are not homeowners in the “home” sense. More like property owners than home owners.
Alan, that’s in the pool of defaulted mortgages, not all mortgages. In defaulted mortgages you’d expect to see higher percentages of things like overstated income, payment shock, etc.
We had a client last year that was buying a unit for investment purposes, and he ended up switching mortgage brokers because he kept having to remind his first mortgage broker that he wasn’t going to be an owner occupied situation. I don’t know if that was forgetfulness, incompetence or an attempt to get better a interest rate, but our client had to switch brokers to do the right thing. Many people might just go along or not even notice.
And don’t think not noticing isn’t possible. The amount of paperwork that a buyer has to deal with is reaching the level of the absurd. An escrow could probably list off the documents required, but to just sign a note and deed of trust seemingly requires that a buyer sign about 20 other documents. Some of them are ridiculous, like a document informing the buyer that if they don’t pay, that information will get sent to a credit reporting agency.
66% Occupancy fraud.
That’s the norm for the past few years. Basically if you’re buying as an investor property, you had a bad LO.
It’s pretty sad…
Hi Jillayne~
Boise is hanging in there, but we are much slower YOY.
We are selling 400-600 homes/month in Ada County and it is a great time to be a buyer.
Many resale sellers remain in denial and aren’t going to “give it away”, but builders have gotten real and the good builders are able to sell homes.
Lots of bonus commissions and seller-paid buyer closing costs.
We don’t have the foreclosure problems that other areas are experiencing, but are seeing some foreclosures and short sales.
Speculators/flippers are gone and most buyers are buying to live in long term.
I think we have serious systemic problems in the credit markets that have not yet shown up.
Many bad loans buried in tranches of bond funds that cannot be found and restructured.
This time is different than the S&L crisis.
Would be surprised if we don’t see some financial institutions fail and a national builder or two go under before this is over.
Meanwhile, everyone says that everything will be just fine next Spring 🙂
I’ve lost a client this year who believed she should have the owner occupied rate vs the non-owner even though she was not occupying the property. When I informed her that this was a form of fraud, she informed me there was a lender down the street happy to do the loans. (She had two refi’s at the same time; one was her residence…and one was not. Both in the same town…so it’s not a vacation home).
I wonder if she’s even the least bit uncomfortable when she’s watching the news at night and “mortgage fraud” comes up.
We parted ways.
Jillayne, I’m surprised that stated income doesn’t have a higher figure. We’ve had FHA and double zero-down VA loans for quite some time. ARMs have been around a while too.
The big difference, IMHO, is “over”stated income and expanded debt to income ratios. Consumers were encouraged to lie about their incomes and turned off their brains when it came to being financially responsible.
BTW I absolutely hate the Toyota commercial that’s running right now…it reminds of stated income loans…it shows consumers doing anything to get a new Toyota; including insurance fraud (making it appear as though your current car was distroyed to you can have the nice newer better one). Yuck! What kind of a message is that?
If they go after those that claim primary residence for fraud, state would run out of money and more than half of the people who bought homes will be criminals…
Underwriting was a joke for so long, it must be weird to submit a real loan.
Ubersalad, what you just said might be true for some people in the industry, but I’m sure there were a lot that kept their noses clean too.
As to those who got residential on investment, if they did 1031s they better hope the IRS doesn’t look too closely.
Ubersalad, it could be a real challenge for a LO who entered into this business in 2005 not knowing anything else. I cut my teeth on FHA and VA loans when I began my mortgage career in 2000.
Sorry for being away all day. I braved the mall with my kids. I have been back and forth so many times today through that mall I feel like you could plunk me down blindfolded anywhere in Alderwood Mall and I would be able to find my way around by the smells and music coming out of each particular store. At least Hollister has good rock music. What mind of brilliance thought of that? The customers get to select the music on a computerized jukebox, and they also sell the CDs right at the counter.
Comment 16, ubersalad says: “If they go after those that claim primary residence for fraud, state would run out of money and more than half of the people who bought homes will be criminals”
Funny you should mention that. I believe former WA state DFI Director Chuck Cross was quoted in today’s NYTimes. Let me go find it for you.
“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,
In comment 18 Kary says “I’m sure there were a lot that kept their noses clean too.”
Yes, I agree with you. What makes me sad is that the ones that didn’t do any of this are having to live through the reputation of the ENTIRE group being brought down.
The news media isn’t going to publish stories about just one more loan originator making a loan to a new American Dream owner. It will never happen. What the media WILL go for, is a story about those who kept their noses clean now working to pick up the pieces and rebuild a better system for helping the industry work its way out of this hole.
The only way this is going to happen is if those who are left DO something instead of just talking about doing something.
A few months ago, a reporter contacted me wanting to tell positive stories about consumers who bought a home using a subprime mortgage. He felt that no one was hearing about the 85% that are performing, who might not of had the chance to own a home if not for these mortgages. I contacted my clients who I helped with a subprime and mortgage and no one responded. I’m afraid it was the “stigma” of subprime that prevented them from doing so.
You don’t hear the media covering good news…they drool all over bad news.
Rhonda, I can think of two reasons for that (and I’m sure there are others besides your stigma suggestion).
First, it could be a lot of them feel like they are slaves to their houses (not something restricted to just sub-primes). 85%+ of the credit card holders who carry balances are performing too, but that doesn’t mean they feel good about it. IMHO, credit is too loose in this country for all types of loans, and it’s that way because that’s how the creditors make the most money. They don’t care that 5% of their customers are really suffering, and that an additional 20% of them are having a tough time.
Second, even if they’re doing okay, they may hear the news of declining values, and think they’re not doing so well. I mean really. How well are you doing if your house isn’t appreciating at double digit rates? 😉 Anyway, we met a woman a few months ago who picked up a fixer house in a nice area of Edmonds who was all worried about the timing of her purchase. She should have been excited, but instead the news reports had her concerned.
Schlicke, great article! Over lunch last week a lease broker friend and I were talking about this same subject. He was remembering the good old days when you had to sit across the desk from your lender, not your lenders salesperson.
Risk, hedged and sold off. leads to fraud and misrepresentation. I have had too many clients tell me stories of pressure from lenders to “stretch” the truth. Unfortunately some caved to the pressure and are now feeling the crunch.
Kary, the clients of mine that I’m thinking of had their subprime loan during their 2 year fixed period (with the gross required prepay) and was able to refi into a long term prime mortgage. They were able to do this because (1) home values were still appreciating and (2) they were responsible with their credit (3) they used the two year fixed period to continue correcting what ever caused them to have a subprime mortgage in the first place.
A very small portion of my business was subprime and I’m very proud of my clients who have done what they’re suppose to do.
I view the current mortgage market as a giant correction.
Many people were given opportunities they normally would not have had (home ownership) and a majority are doing well.
The consumers who should never have been a home owner because they are fiscally irresponsible will no longer have that privledge.
The consumers who overstated their incomes and somehow thought they’d be able to meet their mortgage payments may be in trouble too.
People who are buying long term should be fine as long as they are purchasing homes within their means. This is no flippin time to be a flipper! 😉
I do recommend that any consumer with an ARM adjusting 24 months or sooner, contact their Mortgage Professional as soon as possible. With homes not appreciating at the same rate, with some mortgage guidelines being tougher and some products disappearing, you’ll need as much time on your side to get out of your adjustable rate mortgage.
Rhonda wrote: “Kary, the clients of mine that I’m thinking of had their subprime loan during their 2 year fixed period (with the gross required prepay) and was able to refi into a long term prime mortgage. They were able to do this because (1) home values were still appreciating and (2) they were responsible with their credit (3) they used the two year fixed period to continue correcting what ever caused them to have a subprime mortgage in the first place.”
The last point is perhaps the best–use the time to fix what’s wrong. Time does wonders for credit numbers, as long as you don’t give it new reasons to be low.
BTW, a third reason to not want to be interviewed for a story. There’s nothing in it for them, and it’s generally better to stay quiet (a lesson those appearing on 60 Minutes and The Daily Show never seem to learn).
These days, no one wants to be labeled “subprime”. These days they could be stoned by the villagers. When used properly with the right consumers, the subprime mortgage was a good band aid to help people into homes. When used for the wrong consumer or abused, it was a complete disaster.
There were couples who could not manage their bank accounts that I could have approved for a mortgage. When I told them they needed to get things in order, they went somewhere else.
I’m off topic now. Sorry Jillayne. 🙂
Let’s face it, most that bought in the last few years had somewhere in their mind that appreciation would sustain its growth. News media works both ways, it helped created the market growth and now it will also effect the market adjustment.
I wrote: “BTW, a third reason to not want to be interviewed for a story. There’s nothing in it for them, and it’s generally better to stay quiet (a lesson those appearing on 60 Minutes and The Daily Show never seem to learn).”
Within hours of writing that I get a request from someone purporting to be from the LA Times requesting an interview regarding the S&P results for Seattle. Coincidence? 😀
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Occupancy fraud is last year’s biggest problem. Now, fraud is coming out of desperation. As programs dwindle, more LO’s than ever have decided it’s OK to use “white lies” to get loans to fit in more conservative programs. It’s not OK, and their getting caught.
Todd, assuming what you’re saying is correct, I’d guess the LOs that do that aren’t doing anything different than before, it’s just that they’re getting more scrutiny now!
Stated differently, I doubt that there are that many LOs who are not keeping their noses clean now, that were doing so before. So I guess I’m contesting your claim that more LOs are doing bad things. I’d just guess more would be getting caught (but that’s just a guess).
Kary,
I can’t document it with numbers. But in talking to lenders, there’s an alarming increase in the number brokers getting caught red handed. Lenders stepped up their QC as early as last summer, but the last couple months are seeing some scary stuff. One Account Executive I know in California had to cut off 5 of his brokers in five days. This is an A-paper company.
Despite being warned, many LO’s are more desperate, and willing to cheat, then ever.
Kary,
How did your interview go?
Todd,
That was my first inclination; to believe that we’d see an INCREASE in mortgage AND ALSO real estate fraud during a market slowdown rather than a decrease. Commission salespeople get accustom to earning a certain dollar amount each month and it is painful when the flow of money is suddenly cut short.
Todd, here’s what concerns me right now. In a number of my classes, loan originators are telling me they are being solicited to do FHA loans for this broker or that wholesale lender, and they are being told “you don’t have to be a W-2 employee, we’ll just submit the loan under a different LO’s name who IS a W-2 employee and then we’ll just pay you on a 1099.”
The last time I checked the HUD manual, that would not fly with FHA.
Same large, national broker, is telling LOs that they can originate loans in multiple states, and they don’t have to be licensed in that state because “we’ll just submit the loan under another LO’s name who IS licensed in that state and pay you on a 1099.”
What do you think about all this? I am hearing this daily now.
I think it’s fraud. Check that, I KNOW it’s fraud. I also know that lenders are on to this, at least the few I have contacts with. I agree Jillayne, there will be more fraud, not less in the coming months.
Jillayne, funny! No interview.
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I think underwriting should combine both automated and manual. Automated is to help screening and then underwriters should do all the paper reveiw manually. In the last couple years, it’s been hard for LOs to compete when many are willing to commit frauds, but we should think about their consequences; it’s better be safe than sorry.
I think more checks and balances should be implemented, manual u/w, to clear up the short run on fraud in the industry which in turn would make long term effects on the industry minimual. I also agree that fraud is in all industries. As technology changes, the methods used by the those individuals commiting the fraud might become more obvious. It’s a slow process but I think in the years to come fraud hopefully will decline.
It seems everybody is focusing on the sales/production, forgeting about the risk/consequence nowadays, even the AE/underwriters working for the lender. The recent mortgage fraud developments taught us a good lesson.
Continuing education on Ethics should be required every time to renew MB/Lo license. Law should also enforce punishment for such fraud.
Wow I had no idea! Punishment for this Fruad should be highly enforced. I find it hard to believe they even try or think they will get away with it. A total eye opener for me.
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