Over the holidays I found myself back in my hometown, touching base with a collection of mouth breathers, malcontents and bystanders – my friends. There was no shortage of beer and whiskey and whatnot at many a meeting of my now-40+ tribe of geezers. One late night conversation in particular that has stuck in my memory was with a buddy who I’ve known since Driver’s Ed in high school – a longtime veteran of the mortgage industry. I’ll call him Ladies Man Steve – debatably accurate.
We had a long discussion on the front porch of a mutual friend’s house in downtown Austin about his take on the mortgage problems we’re now facing, and he had some interesting perspectives. Ladies Man Steve has worked in countless mortgage shops in various sales roles, from a loan officer at a broker to a bank rep trawling for loans from the brokerage community.
Our exchange went like this:
SH: I hate to steer you away from telling me why you were the most underrated soccer player in Westwood High history – your nonexistent defense notwithstanding – but what’s your take on this mortgage mess?
Ladies Man Steve (LMS): Scotty Hodge, you’re not going to like to hear this, but it was you banker types who caused it all. The salesmen out there did the dirty work, but the bankers slowly and methodically lowered their underwriting standards to drive volumes. The subprime specialists were worse, but banks were right there. They were begging us to send them absolute crap – even begged us to lie. It’s like letting the Cookie Monster loose in a Keebler factory. He’s going to eat some frickin’ cookies. We sold it if they were paying for it.
SH: Did you ever get coached on how to make an applicant look much better than he was?
LMS: All the time!
SH: Even with banks deals?
LMS: All the freakin’ time. It would take place at a broker’s office, but the bank rep would be there, sometimes running the meeting.
SH: Damn, but don’t you think there’s blame to go around – appraisers, borrowers, brokers and yes, even bankers?
LMS: Maybe, but if the bankers are trying to say they had nothing to do with this, they’re high, man. This line from bankers about the appraisers being behind it all is a huge load of crap. Appraisers were the most honest people in the industry – a relative term, I know. But think about it, during the boom they didn’t care if they got blacklisted by a broker or two because his appraisals didn’t hit “the number.” There was so much volume that they could get blacklisted 10 times over and still have more work than they knew what to do with. The vast majority knew that fudging appraisals meant their ass and their license if they got caught, so they were pretty well in line.Definitely, borrowers had their hand in it. The biggest problem was the upper middle class people trying to keep up with the Joneses. There was a groundswell of pressure to own the biggest house you could find – bigger and better than the guys you played poker with. It wasn’t the $30K a year borrower trying to qualify for a $250,000 house who’s now facing foreclosure; it was the educated, professional $100K guy trying to beg, borrow and steal his way into a $750,000 house. Ironically, I buy and sell pools of foreclosed loans now, and those are the loans that I see for the most part.
SH: What were the banks doing specifically that encouraged shadiness?
LMS: Damn, I could spend hours on that. Let’s start with the Stated Income loan. It was designed for the self-employed borrower whose actual income was, shall we say, not reflected in his tax return. If he could prove his business had been around for two years, had a 580 FICO, we could use his unverified “stated income” as the basis for the loan. We were in business. I swear, for a time we could go with no money down on a Stated Income loan and a 580 FICO! I knew guys who literally went out of business when things got bad and Stated Income loans went by the wayside.I saw a deal for a guy who I knew hadn’t worked for two years, but he had a business license in good standing for three years. He qualified for a $300,000 mortgage with 5% down and a 580 FICO, and the only way he and his wife had to repay was through her $6.00/hr. manicure job! All because his “stated” income from the “business” was pretty high and the business license was current! We didn’t verify one dollar; we didn’t verify *(#&@*.
I didn’t care if he could repay and the banks at the time sure as HELL didn’t care – as long as the paperwork met the guidelines.
SH: No way!
LMS: Oh, dude, that’s not even that bad. I did a hundred deals that way. That’s how I got my own mortgage! That happened every day, routinely, without a bank underwriter even batting an eye. Why? Those underwriters got bonused on their loan volume – maybe up to 20% – 30% of base.
It got so bad that l would call the processors and ask them which underwriter got a particular deal. If she wasn’t a Friendly, I’d make the processor go and switch the file to a new desk. We did it all the time.
Then the banks came up with the “Stated Wage Earner” loan. This let regular W-2 employees – not business owners – qualify based on a stated, unverified income under the right circumstances. We would literally use White Out on the W-2 to cover all the income information – per bank guidelines! – and then submit it. It was nuts! I’d hear about these programs and not even believe it was real. As long as it was “reasonable for the area,” underwriting would push it through.
Even when underwriting called us on our BS, they helped us make the loan right. I once had a casino cocktail waitress who stated an income of $100,000. The underwriter balked, and then proceeded to tell me how to help her write a letter that would explain that that kind of income was reasonable for a cocktail waitress in a Carson City casino. He’d tell me how to word it; they practically wrote the letters for us!
Every time they came up with a new “Stated” program, we’d huddle around a conference call, and the bank would explain the new Stated guidelines. The guy doesn’t have to be living. The guy doesn’t have to be breathing, have a job, nothing – as long as he meets the guidelines. Our sessions on how to counsel borrowers were thinly veiled sessions on how to lie without lying. How to back into a Stated Income so the applicant would qualify. I couldn’t believe it. I knew it was freakin’ crazy, but auditing underwriting standards wasn’t my job. Let me tell you, BANKS came up with the term “Liar Loan,” not brokers.
Just yesterday I was listening to a Fed “mortgage expert” being interviewed on NPR. He was saying that underwriting has changed so much that this problem could never repeat itself. I almost fell out of my chair.
Now shut the hell up and get me a beer, Scotty Hodge….
More rosy next time. –smh