Friday, March 28, 2008

Banks "Forced to Make" Subprime Loans? Or Is This a Joke?

One of the first excuses for the sub-prime implosion was that, due to Congressional interference, banks were "forced" to write crappy loans.


Now it turns out that some Banks's the memo, written by a Chase loan staffer, as reported in the Portland Oregonian, describing how to game Chase's loan-scoring system:

3 handy steps" for getting a questionable loan approved by JPM Chase's automatic system:

1. Lump all of an applicant's compensation as the applicant's base income, rather than breaking out commissions, bonuses and tips.
2. Do not disclose use of gifts for down payments.
3. If all else fails, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want. Do the same for assets.

My, my. The Oregonian article goes on:

Chase, the nation's second-largest bank, originates mortgage loans itself but also operates a wholesale arm that underwrites and funds loans brought to them by a network of mortgage brokers. The "Cheats & Tricks" memo was instructing those brokers how to get difficult loans approved by Zippy [the nickname of the automated system.]

"Never fear," the memo states. "Zippy can be adjusted (just ever so slightly.)"

The Chase memo deals specifically with so-called stated-income asset loans, one of the most dangerous of the mortgage industry's innovations of recent years. Known as "liar loans" in some circles because lenders made little effort to verify information in the borrowers' loan application, they have defaulted in large number since the housing bust began in 2007. . .

Note that there is speculation that the "memo" published by the Oregonian may have been the work of an in-house Chase jokester. It's also possible, of course, that the "memo" describes actions that were taken by some loan officers/brokers, and memorialized by the "memo."

Chase, of course, says that the "memo" does not represent official policy. Doh.

Here's the stuff that actually counts:

"During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.

Like your Momma always said: "Follow the MONEY."

HT: BigPicture


M.Z. said...

I'm shocked, althought I probably shouldn't be, at the amount of cred the "it's the poor people's fault" line is getting. I'm glad to see you're not buying it.

Dad29 said...

There are two sides to every story.

There are also plenty of 'speculative' buyers--in one study (FRB/NY) about 50% of loans from a given bundle--which are junk, too.

And let's face it--some borrowers are just plain stupid as well as being covetous of home-ownership.

But in the end, I suspect the brokers/loan-makers were really the ones who did preponderance of the bad deeds. Fat commissions and bonuses.

Neo-Con Tastic said...

You'd be surprised at how brokers pushed loans through to the wholesalers. What you've listed is just the tip of the iceberg.

620 credit score 100% LTV Stated is an absurd loan... and it happened all too often.

The people are just as much at fault though. They see what their payments will be before they sign the closing papers. Sure, they may be persuaded into feeling comfortable with the payment but they know their budgets - no one else.

M.Z. said...

Like Dad29, I'm not losing sleep over those who fraudulently received owner-occupied financing. As to your example, I don't fault the fool who dreams beyond his present circumstances when he fails. I fault the fool who acted with surety that he would succeed despite all the contrary experience he should have had.