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.
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” dated Nov 28, 2007. Anyone can read the report by going to fitchratings.com You have to provide them with an email address, but there is no charge. Here are the bullet points:
45 loans with early defaults, originated during 2006, subprime, with an average FICO score of 686. Each loan had one or more of the following characteristics:
66% Occupancy fraud (stated owner occupied but never occupied)
51% Property value was materially different from the original appraisal
48% First time homebuyer yet credit report showed other mortgage information
44% Payment shock greater than 100% and some instances of 200% payment shock
44% Questionable stated income or employment in conflict with info on the credit report
22% Hawk Alert (Fraud) noted on the credit report
18% Social security numbers on the credit report do not match the SS# on the application
17% Seller concessions outside the allowable parameters
16% Credit report indicated their score was artificially inflated via an authorized user
16% Straw buyer
16% Identity theft indicated
10% Signature fraud indicated
6% Not an arms-length transaction
Fitch explained that when a lender used a high FICO score or a high property value/lower LTV to offset other risk factors, when just one of the above areas of fraud were present, the risk of default overshadowed the high FICO and property value.
On December 31, 2007 Fitch downgraded 5.3 billion in RMBS, and this is just ONE ratings agency.
Future Outlook
Old-fashioned human underwriting is making its way back to banks and lenders. This is good news to everyone but the people who answered sales job ads that said “make six figures your first year with no experience” who got into the industry for no other reason than to make money, who don’t care about homeowners, and who really don’t care much about mortgage lending at all. Those that care, that will complain about the amount of time it will take to hand-underwrite your files, to that I say, let the invisible hand of the free market help re-build competent, competitive, service-oriented underwriting departments without the god-like attitude.
The future begins now. We should all expect massive re-assessment of risk management processes within those companies that originate loans such as bankers and lenders. Mortgage brokers should prepare for their banks and lenders to probe deeper into the mortgage broker’s business practices, including systems, education, and training on risk reduction, fraud “no tolerance” policies, and anonymous whistleblower fraud reporting systems.
This also holds true for investment bankers issuing Residential Mortgage Backed Securities. Fitch is putting everyone on notice that it was not able to and cannot, today properly rate RMBS if they’re left to rely on fraudulent loan files. Since risk assessment is only now beginning, I predict the vintage 2007 subprime loans will fare no better than 2006.
However, when we look back 20 years from now perhaps the biggest mortgage fraud case of them all will be the corporate CEOs that left taxpayers and shareholders holding the bag while they scooted out the door holding their golden parachute.
Report mortgage fraud tips to the FBI by following this link.
Part 1: Mortgage Fraud
Part 2: Case Studies
The article was a nice plug for old school underwriting. But the fact remains, their human like everyone else. To imply that the industry would magically rid itself from fraud is ficticious. Your still going to have the greed element. Dont be suprised to see a underwriter, LO, and appraiser in kahutz. Where there’s greed, theres will be fraud.
I agree i believe that going back to some of the old ways are good because alot of people back then believe in honesty and didn’t take advantage of people also i believe in alot of the new rules hopefully years down the road we wont have the same problems we are having today.
Also that the industry will keep up with the right rules and not take advantage of people.
Back to basics is where we need to go. Yes, it’s kind of scary to think of the possibly of not being able to qualify for a loan myself. However, I would much rather know I was completely able to pay for my mortgage for as long as I want to live in my home, than to be wondering if I really do make enough money or that the mortgage terms will allow me to stay afloat.
What is amazing to me is that all of my files that have gone through DU, or Lp have also all been hand underwritten by an underwriter. I have also just recently underwritten for a large bank, what I found interesting was the Loan Officer, who would create their own story when asked a question about a file vs just calling the borrower for an explanation. They just do not want to take the time, they just want the file closed. Not all of them are being fraudulant they just want their paycheck and the file has to close by the end of the month. Most do not understand that the file does go through an audit system and everything has to be documented and in the file.
I do agree that we should go back to make sense underwriting and that the credit score alone does not mean that the borrower is qualified to repay the loan. If a borrower has a high fico score, they require less documentation. You can have a high fico score if you are able to juggle and make your payments on time. It does not necessarily mean you can qualify for a mortgage.
I do not think we are ever going to have a perfect answer for eliminating mortgage fraud, but I think that maybe we are going in the right direction. One arena that has not been greatly affected by the mortgage melt down has been FHA. There requirements/guidelines have remained consistant throughout the years and therefore has not had a lot of defaulted loans. The percentage of loans that have defaulted have all been paid by mortgage insurance premiums that have been self funded by the borrower or seller paid closing costs
The closing statement of this article was interesting. I wonder if he knew how true those words would become? There can’t be one perfect answer but one thing is clear, any of us who chose to stay will feel the pain of the scrutiny that we get whenever someone asks us what we do and we tell them and this is what the person asking us brings up. It hurts everytime, I’ve had family members chastize me, friends insult me, and I’ve even gone through my own personal chaos because of this. The face remains that I might have to carry the scars of this without having ever done any of these things but it’s because I believe that the way I do business will change this perception in the years to come. There’s no silver bullet but bringing back human common sense will help put a different meaning in home buying and financing. Besides, didn’t this happen in the late 80’s with the S&L crisis?
This article was my favorite one so far, as I have said before I am a processor that finds the need to keep my CE’s current even though not required. I think between my eyes and the underwriters we are making sure that everything is done ethically and completely. I make a practice to scrutinize all documentation and always have. I am so happy that I do not have to argue with anyone anymore about what documentation we need to close a file as we are back to needing everything and in having all the documentation we can very reasonably assure we are not being lied to. I also agree that the last comment is brilliant
Data in Data out automated underwriting can set the stage for a loan approval but personal review is proven to be the best way. FICO scores are not good, look at the report grade the credit history I have a client with 22 open paid as agreed credit lines and the FICO score is 645 no lates manages his money for if you pay as agreed you must be earining your way and deserve the credit offered to you, yet another client has 4 traelines 1X30 and theree score is 710 ? not much parity the scoring ssystem is rigged and you can ask 10 people how it works and you’ll get 9 7/8 diffrent ansawers for sure.Back to the foundation of underwriting is were we need to go ?