Skinning the Mortgage Market

Add to: Digg | del.icio.us | Technorati | Yahoo | BlinkList | Spurl | reddit | Furl

By Andrew Gordon

What happens to the pharmacist who fills a prescription without a doctor’s signature?

Or to the gun seller who falsifies information on a buyer’s application?

These people are licensed. It means they’ve been trained in how to dispense drugs or sell guns. And it also means that they have a legal obligation to follow mandated procedures.

If they don’t, they could go to jail.

Of course, that’s only if they’re caught ...

This brings us to the mortgage business.

Is there anyone left in America who doesn’t think there was fraud committed by licensed lenders and brokers? And that this fraud took place on a massive scale?

I bet you either know somebody who is in danger of losing their home, or you have heard stories from friends and family of people in this predicament.

I had lunch with a friend of mine on Saturday. He was telling me about his father who bought a house in Florida for more than $300,000. He had been badgered almost every single day by brokers encouraging him to take out a home mortgage. He finally relented.

He was working part-time. How he could qualify for a $300,000 loan is anyone’s guess.

But I think guessing can get us pretty close to the truth. Some of the numbers on the loan application were inflated. They had to be to get the paperwork approved by the bank’s automatic underwriting system.

Now I don’t know this for a fact. And I don’t know who did the inflating – my friend’s father or the broker. But even if it were my friend’s father, I suspect just a little double-checking by the broker could have unearthed much more modest numbers.

My friend’s father has been in and out of the hospital recently. He fell behind on his payments long ago. Now his house is in foreclosure and on the auction block for $50,000. So far, there have been no bids.

This is a tragic situation. And variations of it are being played out all over the country. But the variations can be very different. Some foreclosed homes were vacation homes. Some were new homes. Some were upgrades over previous homes. And some were bought by investors who wanted to sell them quickly for a handsome profit.

We have some very sophisticated buyers caught up in the housing contraction. And some are on the other end of the spectrum. We have wealthy buyers and buyers of very modest means. We have buyers in booming markets (like Phoenix) and buyers in depressed areas (like parts of Detroit and Cleveland).

Some of these buyers are more to blame than others. And I’d say that my friend’s father wasn’t entirely blameless. But regardless of the degree of culpability, all of them were enabled by a supposedly lax lending system. But “lax” doesn’t do justice to what happened.

How about “deliberately sabotaged?”

A memo just came to light that shows just how “lax” those standards were. Its title is “Zippy Cheats & Tricks.” Zippy is Chase’s automatic underwriting system for mortgage loans. Loans must be approved by Zippy to go through.

“Never fear,” says the memo. “Zippy can be adjusted (just ever so slightly.)” All brokers had to do was group tips, bonuses and other stuff into base income. If that didn’t work, says the memo, just inflate stated income by “$500 to see if you can get the finding you want.”

In the interests of disclosure, I have to admit that Chase was the bank that approved my “no-doc” refinancing loan in the mid-1990s.

You see, I’d do anything to avoid paying taxes. (I know I’m not alone in this. I just think that I should get to spend the money I earn ... or at least as much of it as possible.)