Sunday, September 21, 2008

Mortgage Meltdown and the Underwriter

Oh boy! Let's step aside from discussion of life with family, and take a look at why I'm where I am now (mid-life career purgatory).  The housing crisis like a drowning elephant threatens to pull under everything and everyone it can grab as it gasps and finally slips beneath the surface.  Let's make an attempt at honesty.  Anyone in the mortgage industry or any individual who was remotely paying attention knew that the double-digit annual increase in home values could not be sustained.  NO way!

As a mortgage underwriter who was entrusted to review and to decision residential loans for my employer, I was expected to go the extra mile to find a way to "make the deal."  I didn't want to disappoint my company, the investors, the account executives (sales), or our broker (client). GASP!  Not too many excuses for loan denials were accepted  given the plethora of loan programs available with the exception of fraud (this will be discussed at another time).

The poster-child loan program for this housing mess, the option arm/pick-a-pay was absolutely abused!  In a nutshell, the program allowed for borrowers to pay less than the standard interest requirement during the initial period of the loan which actually ADDED interest to the original principal...a term labeled "negative amortization." Scary... and to top it off, IF the borrower needed to payoff the loan early, he was slapped with a huge pre-payment penalty. This product was rarely applied as intended by the authors of the program, and often only was successful if/when housing values were increasing rapidly.

In essence, marginal borrowers were being qualified at rates lower than the current market rents to qualify for larger loans so they could outbid others for limited inventory (property). Consequently, strong borrowers in the traditional sense with excellent credit, high and stable income, and good asset position were actually forced to pay more than they should have. These borrowers, understanding their financial limits, often stepped aside.

To further layer the risk of the option arm product was the use of limited documentation which included the stated income product. Originally intended for the self-employed borrower whose income would fluctuate from year to year, stated income did not require an applicant to prove how much he truly earned via pay stub or federal tax return.  In fact, the program was widely used to include teachers, police officers, and fire fighters. HMMM.  We quickly named these deals "liar loans." I could see the long time business owner making $10,000/month, but not the young elementary school teacher.  If the application "stated" $10,000/month, this is what was used to qualify with few questions asked.

Wow, I could go in many directions from here. I could mention that often times I was told that the $10,000 included a spouse's, parent's or sibling's unverifiable income that wasn't included because that individual's credit was poor. I could stand up proudly and state that over time our company and other companies within the industry decided to require further documentation to support that "stated" monthly income through the use of or internet websites or "adda-boy" letters from independent parties who had some business relationship with the borrower.

Of course, in the end the lending business was fighting a losing battle.  All the parties involved from the unqualified borrower to the greedy investor fell in love with the high risk loan products, the limited documentation loans, and the no down payment programs.  Sadly when given the opportunity to stretch the truth for financial gain, some individuals will not think twice about doing just that.  

The trouble snowballed industrywide. Honesty, integrity and accountability were crushed by profits and greed. I couldn't stop what was happening and neither could anyone else. Why would a housing industry in which so many were making so much decide to slow down?  I suppose in retrospect, the only entity that could have made an impact was the federal government which obviously was too excited about how well the economy was growing and all the new jobs that were being created. 

My wife and I went to see "Burn After Reading" last weekend.  J.K. Simmons played a CIA supervisor whose final line seems appropriate to the current housing meltdown when he asks "what have we learned from this?"

No comments: