Posts
Ok, this isn't going to be an "American Pie...One time at Band Camp" story where a flute is inserted into some orifice....but who knows.... it could have been because I am not exactly sure what Curly Sue was doing with that Loan Officer from Florida. Now that I have your attention....I previously wrote about the overall experience of “Experienced Loan Officer Academy”. But, I wanted to save a chapter for what I actually learned in training.
Apparently, The Bank of Hell had unleashed a loan product they were very proud of and encouraged us to use whenever possible….and if you followed the steps I was taught, you could almost use it all of the time. More on that a little later.
The new “Super” loan product they taught was a Fannie Mae Stated Income/Stated Asset loan. Why is this so special? Let me explain. The acronym loans that Turdy wrote about previously carried a higher interest rate due to the inherent perceived risk of those products (i.e. NINA, NINANE). Fannie Mae backed loans had the lowest interest rate of all the loan products because they were supposed to be A+ “prime” loans. They carried the lowest risk and therefore had the lowest rate. But this whole system got bastardized by the Bank of Hell. But to be fair, it was with Fannie Mae’s blessing…and no, I am not trying to incite Barney Frank.
How did this work? Well, I was taught in training that if I had a client with a credit score of 680 (decent score) or higher on a purchase or 720 (good) or higher on a cash out refinance transaction it could be eligible for the “Super” loan. If you met these score requirements you didn’t have to verify the borrower’s income with pesky paystubs or W-2’s and you didn’t have to verify that the money they told you about for their down payment and closing costs actually existed….and the “beauty” of this was the rate and terms on the loan were the same as someone who fully documented their loan. Brilliant!! But wait ...there is more…if the value you have listed for the property they were purchasing or refinancing was acceptable to the automated underwriting program….you didn’t have to get an appraisal. You could get use an automated value from the “internets”!! Ok, so no income verified, no assets/down payment verified, and no physical appraisal needed to be completed…..and still the interest rate was no worse than the suckers that fully documented their loan with their “primo” credit.
Of course the Mortgage Devil used the powers of the “Super” loan for evil and not good. He took advantage of his self-employed borrowers by having them convinced he could do a stated income/stated asset loan for them a 1/2 % below the competition because he was “such a good guy”. But what he actually did was inflate the rate of the “Super” loan to make a bunch of overage (extra commission). For example…during the time period in question…a traditional stated income/stated asset loan would have a rate of 8.00% for a 30 year fixed while a Fannie Mae’s A+ loans had a rate of 6.00%. So, the Mortgage Devil would have his client call some mortgage broker who didn’t have the "Super" loan and get quoted 8.00%. He would then sell them a loan at 7.50%....he was a hero!! Wait, what is that you say? I thought the “super” loan was the same rate as Fannie Mae’s A+ rate? Well, you are correct. The Mortgage Devil would take that extra 1.50% as overage and make a ton of money of that one loan. As, I was told by my Munchkin Trainer this loan was supposed to give us a competitive advantage against the competition so we could close loans quicker and hassle our borrower’s less. But the Mortgage Devil found a sleazy way to take advantage of the system so that he could pay for all of his second homes.
When I returned from training to the Bank of Hell...I got the "real" training on how to use/manipulate/bastardize this "Super" loan. What was discovered by the Mortgage Devil or one his Minions is the exact sequence you had to follow to limit the paperwork and manipulate Fannie’s system. Here is the step by step way I was taught and why it needed to be done that way:
1) take loan application over the phone and enter into computer.
2) pull credit...if the score meets the requirement move to step 3.
3) go ahead and get an automated value for the property and enter it into the computer
3) make sure you have stated enough income to keep the debt ratio under 45%.
4) send the loan through Fannie Mae's underwriting system to get "Super" loan approval without having to verify the income, assets, and no physical appraisal..Brilliant!
Because if you just put a value based upon what the Borrower thinks their property is worth and you send it through Fannie Mae's automated underwriting it may get approved with that value. You excitedly call your customer and say..."Congratulations, you are already approved. Since your credit is so great...we don't need any documentation or even an appraisal". But what happens when the automated value is different than what the customer thinks the property is worth? If you enter the automated value and Fannie's automated underwriting doesn't like it...then it would red flag the whole loan for excessive value or cut your value where you may have a loan to value problem. No one wants red flag's on their loans or value issues. If you pull the automated value first as suggested in step 3 above, you can see if their is a potential problem ahead of time. Good deal, right? Actually, the system was set up for check and balances against over-inflated appraisals or potential for values exceeding loan amounts. By reversing the steps you circumvent that process. Brilliant!!..hmmm?
Why do you have to keep the debt ratio under 45%...well, because if it was higher it wasn't eligible for a "Super" loan. I know your next question will be..."well what if the income they told you that they made causes the debt ratio to exceed 45%?"....my answer comes from the Mortgage Devil...in his words...you "just bump up the income to make sure it is under 45%". Duh!! It's so simple...and so fraudulent at the same time. He honestly didn't see where this was a problem. You "just bump up the income!"....that was his war-cry that day. Ok....so, we learned today how to turn a Fannie Mae loan into a Liar's Loan....and still charge a higher interest rate to gain more commission...got it!!
Showing posts with label Fraud. Show all posts
Showing posts with label Fraud. Show all posts
Sunday, May 9, 2010
Friday, May 7, 2010
Good Luck With That....
I'm interrupting this regularly scheduled blog to insert some rant and commentary about attempts to regulate and reform the mortgage industry. I intended to blog today about the crazy loans we did but the universe has been speaking to me again and it is telling me that people still don't get it.
I work at an institution of higher learning funded by public dollars, well, at least we used to be. We probably are financed by junk bonds and mortgage backed securities these days due to the budget crisis of the state, which ironically, my former industry contributed to. I only mention this because yesterday I received an email celebrating that our business college is changing its MBA program to focus on "sustainable business practices and corporate social responsibility". This change is described as a necessary response to corporate corruption and lack of responsibility in recent years in the U.S. economy. As part of this transformation there will be a new focus on ethics in business. I have the same reaction to this that I would if you told me that you are going to take over the world today. My response, "Yeah, well good luck with that.".
Now I know that the fact that I take issue with this will make some of you react like I just announced that I like to kick puppies. It is not that I am against ethics and responsibility, I certainly don't picket businesses with signs that read, "Fuck Ethics" or "Be The Biggest Asshole You Can Be". What I have a problem with is the idea that adding courses on ethics will result in a more "socially responsible" corporate climate. It won't. It is a very well crafted public relations move by business colleges and corporations to claim they want MBA's with a social conscience, but in practice, it is not going to eliminate or reduce unethical behavior.
First, you can't truly teach ethics just like you can't teach dignity, entrepreneurship, humor, or intelligence. You can give people tools to enhance some of these innate skills but you can't teach them. Another part of the individual's personality that can't be taught is whether they are risk preferring or risk averse. If someone is highly risk averse and has an inherent system of ethics that dictates that lying and cheating are bad, they will behave ethically because they will self police and fear the repercussions for unethical behavior. Someone with flexible morality and a less rigid ethical system may not self police their behavior, particularly if they are risk preferring. In this instance, the fear of getting punished through legal channels or getting fired will not be enough incentive to keep them from behaving in an "unethical" manner.
What compounds this problem is that there will always be an incentive for people to behave unethically and in a risky fashion as long as there are gains to be realized for engaging in this behavior. Look at the jockey Calvin Borel who just won the Kentucky Derby. He was willing to take the risky path of riding the rail in an attempt to gain a competitive advantage over the field. This isn't unethical but it is risky. He succeeded in winning the race not just because he is an incredible jockey with a fast horse, but because he was willing to do what his competitors wouldn't. He was willing to risk disaster for the gains to be realized if the risk paid off.
If you are willing to do what your competitors aren't there will probably be gains to be realized by doing so. In my time in the mortgage industry nobody embodied this ability to gain at the margin like the Mortgage Devil. He revolutionized our market and created a virtual monopoly. He did this by doing what the rest of us weren't willing to do. These activities included answering customer's phone calls 24 hours a day, never taking a vacation, drinking grass water to avoid having to eat food and take a break, and volumes of unethical and fraudulent behavior. What did he get in return for this behavior? Yearly earnings between one and two million dollars and for many years there was no credible threat of punishment for this behavior.
A. Hole and I used to talk about his flexible morality. We never understood how he could get on his high horse and crucify someone for committing fraud while he was doing the same thing. Ironically, he had an MBA and took business ethics courses. They didn't work as intended. The bottom line is that there was no policing of loan officer's behavior so there was no incentive for him to behave in an ethical manner. Teaching MBA's ethical responsibility won't achieve more corporate social responsibility. The only way to encourage ethical behavior is to reward that behavior and punish those who behave unethically. Currently, those institutions are not in place in most industries, but particularly in the mortgage industry.
During the peak of the housing boom the entire mortgage industry operated under the 80/20 rule. Automated underwriting was touted as working for 80% of loans and the industry seemed to accept that if 80% of loan officers were behaving than it would more than make up for the 20% committing fraud. Turns out, the 80/20 rule doesn't always hold or perhaps, it should have been called the 20/80 rule.
This leads me to my next problem with the new regulations of the mortgage industry, the new Nationwide Mortgage Licensing System. For now, it requires mortgage originators not working for an FDIC insured financial institution to become licensed through their state. It requires that mortgage originators subject to background checks, credit reports, continuing education and a series of questions that are meant to kick out applicants who have previously been caught in fraudulent behavior.
Again, this sounds sensible. But, for now mortgage bankers only have to register with the service they don't have to be licensed, oh and there is the small problem that APPARENTLY LOAN OFFICERS CAN FRAUD THE SYSTEM AND GET LICENSED. This is more crap to make you feel like you are being protected by the government with regulations that ARE NOT BEING ENFORCED!!! A regulation that is not enforced is about as useful as a Snuggie.
You should be pissed that these regulations meant to protect you from the deviants is easily circumvented. You should be outraged that the government is passing regulations meant to help consumers even though they know they aren't going to be enforced and don't even begin to address the real problems. It's all show and no dough.
I know a loan officer who has foreclosures and judgments on their credit report, was asked to resign from another company for fraud or what they describe as a "grey area", and is involved in a lawsuit that relates to a complicated fraud scheme that included a phony loan application and the forging of a signature on settlement papers. There is not a single element of the licensing requirements that this loan officer doesn't violate and they were awarded a license last week. While were at it, why don't we bring back those guys from Enron and give them licenses too.
Regulation without credible punishments, monitoring, or enforcement mechanisms will never work. In fact, I think the more asinine regulations we pass the more fraud we create. It provides an incentive to do what your competitors won't....which is exactly what we are trying to prevent.
Regulating the mortgage industry...hmmm. Good luck with that.
I work at an institution of higher learning funded by public dollars, well, at least we used to be. We probably are financed by junk bonds and mortgage backed securities these days due to the budget crisis of the state, which ironically, my former industry contributed to. I only mention this because yesterday I received an email celebrating that our business college is changing its MBA program to focus on "sustainable business practices and corporate social responsibility". This change is described as a necessary response to corporate corruption and lack of responsibility in recent years in the U.S. economy. As part of this transformation there will be a new focus on ethics in business. I have the same reaction to this that I would if you told me that you are going to take over the world today. My response, "Yeah, well good luck with that.".
Now I know that the fact that I take issue with this will make some of you react like I just announced that I like to kick puppies. It is not that I am against ethics and responsibility, I certainly don't picket businesses with signs that read, "Fuck Ethics" or "Be The Biggest Asshole You Can Be". What I have a problem with is the idea that adding courses on ethics will result in a more "socially responsible" corporate climate. It won't. It is a very well crafted public relations move by business colleges and corporations to claim they want MBA's with a social conscience, but in practice, it is not going to eliminate or reduce unethical behavior.
First, you can't truly teach ethics just like you can't teach dignity, entrepreneurship, humor, or intelligence. You can give people tools to enhance some of these innate skills but you can't teach them. Another part of the individual's personality that can't be taught is whether they are risk preferring or risk averse. If someone is highly risk averse and has an inherent system of ethics that dictates that lying and cheating are bad, they will behave ethically because they will self police and fear the repercussions for unethical behavior. Someone with flexible morality and a less rigid ethical system may not self police their behavior, particularly if they are risk preferring. In this instance, the fear of getting punished through legal channels or getting fired will not be enough incentive to keep them from behaving in an "unethical" manner.
What compounds this problem is that there will always be an incentive for people to behave unethically and in a risky fashion as long as there are gains to be realized for engaging in this behavior. Look at the jockey Calvin Borel who just won the Kentucky Derby. He was willing to take the risky path of riding the rail in an attempt to gain a competitive advantage over the field. This isn't unethical but it is risky. He succeeded in winning the race not just because he is an incredible jockey with a fast horse, but because he was willing to do what his competitors wouldn't. He was willing to risk disaster for the gains to be realized if the risk paid off.
If you are willing to do what your competitors aren't there will probably be gains to be realized by doing so. In my time in the mortgage industry nobody embodied this ability to gain at the margin like the Mortgage Devil. He revolutionized our market and created a virtual monopoly. He did this by doing what the rest of us weren't willing to do. These activities included answering customer's phone calls 24 hours a day, never taking a vacation, drinking grass water to avoid having to eat food and take a break, and volumes of unethical and fraudulent behavior. What did he get in return for this behavior? Yearly earnings between one and two million dollars and for many years there was no credible threat of punishment for this behavior.
A. Hole and I used to talk about his flexible morality. We never understood how he could get on his high horse and crucify someone for committing fraud while he was doing the same thing. Ironically, he had an MBA and took business ethics courses. They didn't work as intended. The bottom line is that there was no policing of loan officer's behavior so there was no incentive for him to behave in an ethical manner. Teaching MBA's ethical responsibility won't achieve more corporate social responsibility. The only way to encourage ethical behavior is to reward that behavior and punish those who behave unethically. Currently, those institutions are not in place in most industries, but particularly in the mortgage industry.
During the peak of the housing boom the entire mortgage industry operated under the 80/20 rule. Automated underwriting was touted as working for 80% of loans and the industry seemed to accept that if 80% of loan officers were behaving than it would more than make up for the 20% committing fraud. Turns out, the 80/20 rule doesn't always hold or perhaps, it should have been called the 20/80 rule.
This leads me to my next problem with the new regulations of the mortgage industry, the new Nationwide Mortgage Licensing System. For now, it requires mortgage originators not working for an FDIC insured financial institution to become licensed through their state. It requires that mortgage originators subject to background checks, credit reports, continuing education and a series of questions that are meant to kick out applicants who have previously been caught in fraudulent behavior.
Again, this sounds sensible. But, for now mortgage bankers only have to register with the service they don't have to be licensed, oh and there is the small problem that APPARENTLY LOAN OFFICERS CAN FRAUD THE SYSTEM AND GET LICENSED. This is more crap to make you feel like you are being protected by the government with regulations that ARE NOT BEING ENFORCED!!! A regulation that is not enforced is about as useful as a Snuggie.
You should be pissed that these regulations meant to protect you from the deviants is easily circumvented. You should be outraged that the government is passing regulations meant to help consumers even though they know they aren't going to be enforced and don't even begin to address the real problems. It's all show and no dough.
I know a loan officer who has foreclosures and judgments on their credit report, was asked to resign from another company for fraud or what they describe as a "grey area", and is involved in a lawsuit that relates to a complicated fraud scheme that included a phony loan application and the forging of a signature on settlement papers. There is not a single element of the licensing requirements that this loan officer doesn't violate and they were awarded a license last week. While were at it, why don't we bring back those guys from Enron and give them licenses too.
Regulation without credible punishments, monitoring, or enforcement mechanisms will never work. In fact, I think the more asinine regulations we pass the more fraud we create. It provides an incentive to do what your competitors won't....which is exactly what we are trying to prevent.
Regulating the mortgage industry...hmmm. Good luck with that.
Monday, May 3, 2010
We Sell Money: Part II Liar's Loans, The Ninas
Even people living in a van down by the river have heard of Liar's Loans and some of these van dwellers may have actually gotten one at some point, hence their new digs. When I first encountered the media's reporting on sub-prime loans I observed that they really didn't get it and this trend continues with their coverage of Liar's Loans. I offer this post so that you might educate yourself as I shock and awe you with tales of giving Liars money.
These loans came in many forms and were known throughout the mortgage industry by acronyms. As with most things in the world, the longer the acronym the more fucked up the description behind it.
What the media refers to as liar's loans were mortgages made to people without verifying whether at least some of the information on their loan application was actually true. A typical loan application(1003) was four pages long and contained information as simple as name, property address, birth date, social security number, employer, income, assets, liabilities, other properties owned, address history and required the signature of the loan officer and the borrower. The reason the loan application is known as a 1003 in the industry is that it is actually Fannie Mae form number 1003.
Most people who have a mortgage loan probably provided myriad paperwork and documentation to get their money, but between 2003 and 2007, quite a few people were able to get money with a driver's license and credit score and nothing else.
The Liar's loan that sensible people will find most shocking is the No Income, No Asset, No Employment loan or what the industry referred to by the very descriptive acronym of NINANE. I used to sing song the acronym so that it came out like Nina Nee, which sounds like the name of someone who should be rocking out in Minneapolis with Prince rather than the name of a loan product so ridiculous that even a complete moron knows it doesn't make sense.
The Nina Nee loan didn't just stop at allowing you to not provide proof of your income, assets, and employment, no that just wasn't risky enough for Nina Nee. Nina Nee didn't even want you to write this on your loan application, it literally was a loan application that was more than fifty percent blank. If the loan could talk, then Nina Nee was saying, "I don't want to hear about your job and ability to repay this loan. I just want to know that you have a social security number and a credit score. Details, Schmetails." Imagine lending hundreds of thousands of dollars to someone with the implicit assumption that they had no money and no job.
In defense of this loan, it did require a down payment or some equity in your home, so it wasn't risky to the degree of say, oh I don't know, lighting a match after dousing yourself in gasoline. I only did one Nina Nee during my time in the industry and it was for a gentleman who had a perfect credit score but thought it was a complete invasion of his privacy to ask for any of his personal information. He was one of my favorite customers ever, he actually owned a company and made a fortune. He just didn't trust banks, the government, postal workers, people who drove minivans, the color yellow...I guess pretty much everyone and everything. Oddly enough, he is one of the few customers that I am absolutely positive has still not defaulted on his loan, go figure.
The best I can figure is that the Nina Nee was invented for drug dealers or people in witness protection because they wouldn't qualify for Nina Nee's cousin, Nina. The Nina was a slightly less risky loan where you didn't have to tell us whether you had money or what you earned but we at least asked that you tell us where you worked. So if you were a drug dealer and you came to me for a loan, I couldn't get you a Nina unless I thought I could convince an underwriter that you were a self employed Pharmaceutical Sales Rep. The scary thing is that if a drug dealer did call me and ask for a loan and he could get an accountant to say he was self employed in pharmaceutical sales, I could have gotten him a Nina instead of the Nina Nee. For the record, I never did list a drug dealer as a pharmaceutical sales rep on a loan application, I'm just saying I could have.
Nina was a tool for people who couldn't state their income on the loan application, remember I didn't say verify, I only said state. As an example, if a convenience store worker needed to make $5000 a month to qualify for a loan he wouldn't be able to do a stated income loan because no underwriter would believe that the income made sense for the job title. Nina was so generous that if a convenience store cashier had great credit and wanted to refinance or purchase, the underwriter would simply call the company and verify that they had a job and not even calculate debt to income ratios to see if the loan made sense.
I did one Nina at the Bank of Hell that sticks out in my mind because it forced me to have a meeting with my Operations Manager and the Mortgage Devil at the same time in the tiny little closet she called an office. These occasions were so awful that I typically left the meeting and immediately went in search of alcohol. Fortunately, there was a lot of liquor hidden in the break room so sometimes you didn't have to go far.
I had some friends that were moving to Florida to be closer to aging parents and were selling a home in a overbuilt beach development. I submitted the loan to my bat shit crazy processor/underwriter who apparently complained to both my bosses about how she was going to have to package it up and send it to Dante's Inferno to be underwritten. Apparently she didn't feel that it was her job or that she had the time but really, she just didn't want anyone in corporate to be aware of her inherent laziness and corner cutting. Here is my best recollection of that meeting:
Operations Manager: "Why do you have to do these crazy loans that have to get sent to corporate to be underwritten? It is much more work for Bat Shit Crazy to get these files in order and ship them there than it is for normal loans we can underwrite here in the office."
Mortgage Devil: "And I don't understand why you are doing this loan as a NINA on a primary residence when you could just say it is a second home and do it as a stated income loan."
Turdy: "Well, I am submitting it as a primary residence Nina because they are actually going to live in the home, which makes it a primary residence. I can't do stated income because we have no idea how much money he will make in his contracting business in Florida because we don't have a two year history to support it. Oh and I guess, there is also the hurdle of having to explain why they are selling their primary residence here if they are really buying a second home?"
Mortgage Devil: "Duh. That is why we have the exception process through the bank, all you need to do is list it as a second home on the application and under the real estate owned section, just don't mention the house is pending sale. Then you can finance them at 100% in Florida so that they don't need the money they are getting from the sale of their house here to put down on their new home. Then it can be underwritten here and won't force us to have to deal with the underwriters in Dante's Inferno. Problem solved."
Turdy: "So let me see if I understand what you two are saying to me. You want me to lie about the purpose of the loan and the income of the borrower because it would be easier for me to do that than for Bat Shit Crazy to have to deal with Dante's Inferno and the extra work of sending a loan there?
Operations Manager: "I don't understand why you always have to be so difficult and seem to have such a hard time just doing things our way. Do what you want, Bat Shit Crazy will send it to Dante's Inferno just don't expect it to close anytime soon."
I'm not going to get into the exception process at the bank right now because if you are anything like me, you have a maximum amount of craziness and nonsense that you can tolerate in one sitting and I would like to keep you around as a reader. I will say this, though. The Mortgage Devil encouraging me to commit fraud and cut corners was a regular occurrence. This was a man who once did a stated income loan (not a Nina or a Nina Nee) for two retired borrowers on social security. WTF? Can you imagine a stated income loan where the maximum amount a person could possibly earn is a Google search away? Doesn't it make you wonder why an underwriter didn't stand up and say, "Seriously, Mortgage Devil. If you have to state income for someone on a fixed income, they probably shouldn't be buying the property." No underwriter said this because the Bank of Hell gave him an exception to do what is possibly, one of the most egregious liar's loans I have ever heard of.
The subtext of the conversation above is subtle so I must point out what I know now. The Mortgage Devil and his operations manager, as well as the local processing and underwriting staff, did not want loans going to corporate and for good reason. The more loans corporate saw, the more attention the branch would get at corporate, and the more likely they would be to start investigating the goings on. There will be much more on that in later posts...
I guess my problem with the media's coverage of Liar's loans is that it misleads the public by insinuating that anyone who got a loan without verifying some information on their loan application or any loan officer who submitted these loans committed fraud. This is not the case. In fact, the least fraudulent loan in the entire world is the Nina Nee. How in the hell can you commit fraud if you don't even ask any questions that the customer can lie about? That is not to say that fraud didn't go hand in hand with these loans to some degree but the level of fraud involved in these loans ranged from the egregious to what many in the industry liked to call the grey area.
I might have a few customers living in vans down by the river, it would not shock me. What might shock you is that the Ninas were not the riskiest loans we did at the Bank of Hell, some of the riskiest were Fannie Mae prime products and bank portfolio products. Stay tuned, we are getting ready to take our thumbs out of the dike that protects you from the St. Crazy River.
These loans came in many forms and were known throughout the mortgage industry by acronyms. As with most things in the world, the longer the acronym the more fucked up the description behind it.
What the media refers to as liar's loans were mortgages made to people without verifying whether at least some of the information on their loan application was actually true. A typical loan application(1003) was four pages long and contained information as simple as name, property address, birth date, social security number, employer, income, assets, liabilities, other properties owned, address history and required the signature of the loan officer and the borrower. The reason the loan application is known as a 1003 in the industry is that it is actually Fannie Mae form number 1003.
Most people who have a mortgage loan probably provided myriad paperwork and documentation to get their money, but between 2003 and 2007, quite a few people were able to get money with a driver's license and credit score and nothing else.
The Liar's loan that sensible people will find most shocking is the No Income, No Asset, No Employment loan or what the industry referred to by the very descriptive acronym of NINANE. I used to sing song the acronym so that it came out like Nina Nee, which sounds like the name of someone who should be rocking out in Minneapolis with Prince rather than the name of a loan product so ridiculous that even a complete moron knows it doesn't make sense.
The Nina Nee loan didn't just stop at allowing you to not provide proof of your income, assets, and employment, no that just wasn't risky enough for Nina Nee. Nina Nee didn't even want you to write this on your loan application, it literally was a loan application that was more than fifty percent blank. If the loan could talk, then Nina Nee was saying, "I don't want to hear about your job and ability to repay this loan. I just want to know that you have a social security number and a credit score. Details, Schmetails." Imagine lending hundreds of thousands of dollars to someone with the implicit assumption that they had no money and no job.
In defense of this loan, it did require a down payment or some equity in your home, so it wasn't risky to the degree of say, oh I don't know, lighting a match after dousing yourself in gasoline. I only did one Nina Nee during my time in the industry and it was for a gentleman who had a perfect credit score but thought it was a complete invasion of his privacy to ask for any of his personal information. He was one of my favorite customers ever, he actually owned a company and made a fortune. He just didn't trust banks, the government, postal workers, people who drove minivans, the color yellow...I guess pretty much everyone and everything. Oddly enough, he is one of the few customers that I am absolutely positive has still not defaulted on his loan, go figure.
The best I can figure is that the Nina Nee was invented for drug dealers or people in witness protection because they wouldn't qualify for Nina Nee's cousin, Nina. The Nina was a slightly less risky loan where you didn't have to tell us whether you had money or what you earned but we at least asked that you tell us where you worked. So if you were a drug dealer and you came to me for a loan, I couldn't get you a Nina unless I thought I could convince an underwriter that you were a self employed Pharmaceutical Sales Rep. The scary thing is that if a drug dealer did call me and ask for a loan and he could get an accountant to say he was self employed in pharmaceutical sales, I could have gotten him a Nina instead of the Nina Nee. For the record, I never did list a drug dealer as a pharmaceutical sales rep on a loan application, I'm just saying I could have.
Nina was a tool for people who couldn't state their income on the loan application, remember I didn't say verify, I only said state. As an example, if a convenience store worker needed to make $5000 a month to qualify for a loan he wouldn't be able to do a stated income loan because no underwriter would believe that the income made sense for the job title. Nina was so generous that if a convenience store cashier had great credit and wanted to refinance or purchase, the underwriter would simply call the company and verify that they had a job and not even calculate debt to income ratios to see if the loan made sense.
I did one Nina at the Bank of Hell that sticks out in my mind because it forced me to have a meeting with my Operations Manager and the Mortgage Devil at the same time in the tiny little closet she called an office. These occasions were so awful that I typically left the meeting and immediately went in search of alcohol. Fortunately, there was a lot of liquor hidden in the break room so sometimes you didn't have to go far.
I had some friends that were moving to Florida to be closer to aging parents and were selling a home in a overbuilt beach development. I submitted the loan to my bat shit crazy processor/underwriter who apparently complained to both my bosses about how she was going to have to package it up and send it to Dante's Inferno to be underwritten. Apparently she didn't feel that it was her job or that she had the time but really, she just didn't want anyone in corporate to be aware of her inherent laziness and corner cutting. Here is my best recollection of that meeting:
Operations Manager: "Why do you have to do these crazy loans that have to get sent to corporate to be underwritten? It is much more work for Bat Shit Crazy to get these files in order and ship them there than it is for normal loans we can underwrite here in the office."
Mortgage Devil: "And I don't understand why you are doing this loan as a NINA on a primary residence when you could just say it is a second home and do it as a stated income loan."
Turdy: "Well, I am submitting it as a primary residence Nina because they are actually going to live in the home, which makes it a primary residence. I can't do stated income because we have no idea how much money he will make in his contracting business in Florida because we don't have a two year history to support it. Oh and I guess, there is also the hurdle of having to explain why they are selling their primary residence here if they are really buying a second home?"
Mortgage Devil: "Duh. That is why we have the exception process through the bank, all you need to do is list it as a second home on the application and under the real estate owned section, just don't mention the house is pending sale. Then you can finance them at 100% in Florida so that they don't need the money they are getting from the sale of their house here to put down on their new home. Then it can be underwritten here and won't force us to have to deal with the underwriters in Dante's Inferno. Problem solved."
Turdy: "So let me see if I understand what you two are saying to me. You want me to lie about the purpose of the loan and the income of the borrower because it would be easier for me to do that than for Bat Shit Crazy to have to deal with Dante's Inferno and the extra work of sending a loan there?
Operations Manager: "I don't understand why you always have to be so difficult and seem to have such a hard time just doing things our way. Do what you want, Bat Shit Crazy will send it to Dante's Inferno just don't expect it to close anytime soon."
I'm not going to get into the exception process at the bank right now because if you are anything like me, you have a maximum amount of craziness and nonsense that you can tolerate in one sitting and I would like to keep you around as a reader. I will say this, though. The Mortgage Devil encouraging me to commit fraud and cut corners was a regular occurrence. This was a man who once did a stated income loan (not a Nina or a Nina Nee) for two retired borrowers on social security. WTF? Can you imagine a stated income loan where the maximum amount a person could possibly earn is a Google search away? Doesn't it make you wonder why an underwriter didn't stand up and say, "Seriously, Mortgage Devil. If you have to state income for someone on a fixed income, they probably shouldn't be buying the property." No underwriter said this because the Bank of Hell gave him an exception to do what is possibly, one of the most egregious liar's loans I have ever heard of.
The subtext of the conversation above is subtle so I must point out what I know now. The Mortgage Devil and his operations manager, as well as the local processing and underwriting staff, did not want loans going to corporate and for good reason. The more loans corporate saw, the more attention the branch would get at corporate, and the more likely they would be to start investigating the goings on. There will be much more on that in later posts...
I guess my problem with the media's coverage of Liar's loans is that it misleads the public by insinuating that anyone who got a loan without verifying some information on their loan application or any loan officer who submitted these loans committed fraud. This is not the case. In fact, the least fraudulent loan in the entire world is the Nina Nee. How in the hell can you commit fraud if you don't even ask any questions that the customer can lie about? That is not to say that fraud didn't go hand in hand with these loans to some degree but the level of fraud involved in these loans ranged from the egregious to what many in the industry liked to call the grey area.
I might have a few customers living in vans down by the river, it would not shock me. What might shock you is that the Ninas were not the riskiest loans we did at the Bank of Hell, some of the riskiest were Fannie Mae prime products and bank portfolio products. Stay tuned, we are getting ready to take our thumbs out of the dike that protects you from the St. Crazy River.
Monday, April 26, 2010
Forms and Regulations? We don't need any stinking forms and regulations!
I had been at the Bank of Hell for a few weeks when a staff meeting was held, for my benefit, to fill me in on the nuances around the local Bank of Hell branch. The Mortgage Devil had called the meeting under the guise that it was to help me but like everything he does, it really was all about giving him an hour of floor time so that we might be enlightened as to why he was God's gift to the mortgage industry and a fabulous boss.
I was still adjusting to the fact that everyone in that office seemed to hate me right off the bat and it was pretty obvious that they didn't take well to newbies. If I hadn't been so distracted by the office bitchiness and what was proving to be an interesting case study in sociology and anthropology, I would have realized that something was seriously wrong.
In the interest of full disclosure, I have to point out that at the time of this meeting I was still largely ignorant of the internal functions of the mortgage industry. Compounding this ignorance, was an unfamiliarity with the processes of working for a bank rather than a broker. As a broker, my company did not service any of its own loans and I had two outlets for lending. The first being the correspondent loan channel, where we underwrote loans internally according to the investor's guidelines and then they purchased the loan after double checking that we handled the loan according to their standards. The other channel was the broker channel, where I sent the loan to another company to be underwritten and it closed in that company's name. This didn't necessarily mean that the loan would be serviced by the company I shipped the loan to, just that it never had the appearance of being my company's loan product. Basically, I was leaving an environment where I sold other company's loan products to join an environment where I sold the Bank of Hell's loan products. This distinction is tremendously important to the incentives facing decision makers within these firms.
The meeting starts with the Mortgage Devil pontificating about how great the Bank of Hell is and how his production stacks up in the company. At this point, I am a bit in awe of him, I still think he might be a mentor and help me become more successful. So like a complete asshole, I nod and smile at all his accomplishments while ignoring the eye rolling and under the breath comments of his assistants. During staff meetings they would pass notes and call him an asshole and douchebag under their breath while sporting fake smiles to go with their fake tans, fake hair, and fake intelligence.
The meeting goes on and we are discussing a few of my loans and I ask a simple question: "Where do I get a condo questionnaire?" The Mortgage Devil says, "What the hell is a condo questionnaire?" I feel stupid because this man has been in the industry 30 years longer than me and if he doesn't know what a condo questionnaire is then perhaps, I shouldn't either. I explain that at my previous company, if I did a loan on a condominium or a loan in certain developments, we had to send out a form to the homeowner's association that would verify if it was "warrantable" and approved by Fannie Mae or Freddie Mac. The Mortgage Devil looked at me like I just suggested that that we should elect Brittney Spears president of the mortgage division. He dismissed me with, "We don't do that here, we are a bank." So I asked if all condominiums are eligible to lend money on at the Bank of Hell and he told me that indeed, there is no such thing as an ineligible condominium and that we don't worry about those matters because we don't have to sell our loans. I was confused but since I really didn't know the channels and approval processes of the bank, I figured I should take the word of the Mortgage Devil. I even remember thinking how great it was to be at a bank since there was going to be a lot less red tape and impediments to getting loans closed. Yippee, more money for me.
For those of you whom have never worked in the mortgage business, this probably seems like an incredibly innocous conversation. But make no mistake, this is an example of what was happening around the mortgage industry during the housing boom that eventually led to the demise of banks, homeowners, and millions of investors. What I didn't know at the time, was that lack of a condo questionnaire was indicative of a more pervasive problem and that ranged from cutting corners to what probably was outright mortgage fraud by the Mortgage Devil and his minions at the Bank of Hell.
The best I can figure now, with perspective and distance, is that if a loan was underwritten in our office, and not sent to corporate headquarters in Dante's Inferno, corners were cut and forms that were actually required by Fannie Mae were either filled out by processors to make the loan look compliant or were just ignored.
In later posts, I will elaborate on why the regulation of banks is so ineffective but I want to at least make a point about the incentive structure that is responsible for a lot of the ills in the mortgage business.
1. At some point, banks became more concerned about the number of loans closed than the quality of those loans. Now this was intertwined with the ability to package and ship ugly loans as mortgage backed securities but also was cemented into policies within the bank that made for fast and loose decision making and underwriting. At some point, the Bank of Hell changed the payment structure for loan processors and underwriters, such that their salary was now tied to the number of loans that they approved and closed. It basically was like putting the gate keepers on commission for the number of people they let through the gate. Ummm, turns out, that is a pretty shitty idea. When you are getting rewarded for opening the gates, you become a greeter rather than a gatekeeper.
2. The compensation structure for loan officers was incredibly lucrative. At small local banks, historically, loan officers were typically paid a salary and then rewarded for the quality of their loans in bonuses. At some point, this model was abandoned in favor of a bank not having to pay their loan officer any kind of base salary. Obviously, this reduced short term expenses for the bank by making loan officers accountable for generating their own salary in commission. The problem is, that a loan officer who doesn't get rewarded for the quality of their loans, has every incentive to go out and get every loan they can to increase their bottom line. And this is exactly what happened. The long term cost of this probably outweighed the short term savings for a lot of companies because it created an environment where everyone who should have known a loan shouldn't get made had every incentive to make that loan.
3. This doesn't even touch the surface of the perverse incentives rampant in the banking and mortgage industry. I haven't even gotten to district managers, vice presidents, and the financial market innovations that allowed risk to be distributed to those people who didn't even know they were taking it.
I don't want to give the impression that everyone in the mortgage industry was an unscrupulous douchebag, some people like A. Hole and myself behaved ethically and didn't realize what was going on around us at the time and how it played into the bigger picture. On the other hand, The Mortgage Devil was an unscrupulous douchebag and our company not only gave gave him every incentive to do so but they rewarded him handsomely for his behavior.
Two weeks in hell, seventy six to go. Stay tuned, it gets ugly quick.
I was still adjusting to the fact that everyone in that office seemed to hate me right off the bat and it was pretty obvious that they didn't take well to newbies. If I hadn't been so distracted by the office bitchiness and what was proving to be an interesting case study in sociology and anthropology, I would have realized that something was seriously wrong.
In the interest of full disclosure, I have to point out that at the time of this meeting I was still largely ignorant of the internal functions of the mortgage industry. Compounding this ignorance, was an unfamiliarity with the processes of working for a bank rather than a broker. As a broker, my company did not service any of its own loans and I had two outlets for lending. The first being the correspondent loan channel, where we underwrote loans internally according to the investor's guidelines and then they purchased the loan after double checking that we handled the loan according to their standards. The other channel was the broker channel, where I sent the loan to another company to be underwritten and it closed in that company's name. This didn't necessarily mean that the loan would be serviced by the company I shipped the loan to, just that it never had the appearance of being my company's loan product. Basically, I was leaving an environment where I sold other company's loan products to join an environment where I sold the Bank of Hell's loan products. This distinction is tremendously important to the incentives facing decision makers within these firms.
The meeting starts with the Mortgage Devil pontificating about how great the Bank of Hell is and how his production stacks up in the company. At this point, I am a bit in awe of him, I still think he might be a mentor and help me become more successful. So like a complete asshole, I nod and smile at all his accomplishments while ignoring the eye rolling and under the breath comments of his assistants. During staff meetings they would pass notes and call him an asshole and douchebag under their breath while sporting fake smiles to go with their fake tans, fake hair, and fake intelligence.
The meeting goes on and we are discussing a few of my loans and I ask a simple question: "Where do I get a condo questionnaire?" The Mortgage Devil says, "What the hell is a condo questionnaire?" I feel stupid because this man has been in the industry 30 years longer than me and if he doesn't know what a condo questionnaire is then perhaps, I shouldn't either. I explain that at my previous company, if I did a loan on a condominium or a loan in certain developments, we had to send out a form to the homeowner's association that would verify if it was "warrantable" and approved by Fannie Mae or Freddie Mac. The Mortgage Devil looked at me like I just suggested that that we should elect Brittney Spears president of the mortgage division. He dismissed me with, "We don't do that here, we are a bank." So I asked if all condominiums are eligible to lend money on at the Bank of Hell and he told me that indeed, there is no such thing as an ineligible condominium and that we don't worry about those matters because we don't have to sell our loans. I was confused but since I really didn't know the channels and approval processes of the bank, I figured I should take the word of the Mortgage Devil. I even remember thinking how great it was to be at a bank since there was going to be a lot less red tape and impediments to getting loans closed. Yippee, more money for me.
For those of you whom have never worked in the mortgage business, this probably seems like an incredibly innocous conversation. But make no mistake, this is an example of what was happening around the mortgage industry during the housing boom that eventually led to the demise of banks, homeowners, and millions of investors. What I didn't know at the time, was that lack of a condo questionnaire was indicative of a more pervasive problem and that ranged from cutting corners to what probably was outright mortgage fraud by the Mortgage Devil and his minions at the Bank of Hell.
The best I can figure now, with perspective and distance, is that if a loan was underwritten in our office, and not sent to corporate headquarters in Dante's Inferno, corners were cut and forms that were actually required by Fannie Mae were either filled out by processors to make the loan look compliant or were just ignored.
In later posts, I will elaborate on why the regulation of banks is so ineffective but I want to at least make a point about the incentive structure that is responsible for a lot of the ills in the mortgage business.
1. At some point, banks became more concerned about the number of loans closed than the quality of those loans. Now this was intertwined with the ability to package and ship ugly loans as mortgage backed securities but also was cemented into policies within the bank that made for fast and loose decision making and underwriting. At some point, the Bank of Hell changed the payment structure for loan processors and underwriters, such that their salary was now tied to the number of loans that they approved and closed. It basically was like putting the gate keepers on commission for the number of people they let through the gate. Ummm, turns out, that is a pretty shitty idea. When you are getting rewarded for opening the gates, you become a greeter rather than a gatekeeper.
2. The compensation structure for loan officers was incredibly lucrative. At small local banks, historically, loan officers were typically paid a salary and then rewarded for the quality of their loans in bonuses. At some point, this model was abandoned in favor of a bank not having to pay their loan officer any kind of base salary. Obviously, this reduced short term expenses for the bank by making loan officers accountable for generating their own salary in commission. The problem is, that a loan officer who doesn't get rewarded for the quality of their loans, has every incentive to go out and get every loan they can to increase their bottom line. And this is exactly what happened. The long term cost of this probably outweighed the short term savings for a lot of companies because it created an environment where everyone who should have known a loan shouldn't get made had every incentive to make that loan.
3. This doesn't even touch the surface of the perverse incentives rampant in the banking and mortgage industry. I haven't even gotten to district managers, vice presidents, and the financial market innovations that allowed risk to be distributed to those people who didn't even know they were taking it.
I don't want to give the impression that everyone in the mortgage industry was an unscrupulous douchebag, some people like A. Hole and myself behaved ethically and didn't realize what was going on around us at the time and how it played into the bigger picture. On the other hand, The Mortgage Devil was an unscrupulous douchebag and our company not only gave gave him every incentive to do so but they rewarded him handsomely for his behavior.
Two weeks in hell, seventy six to go. Stay tuned, it gets ugly quick.
Subscribe to:
Posts (Atom)
