PBS FRONTLINE – Watch closely – click here.
“To hear some on Wall Street tell it, no one saw the financial crisis coming. As Jamie Dimon, the chairman and CEO of JPMorgan Chase, explained to the Financial Crisis Inquiry Commission, “In mortgage underwriting, somehow we just missed … that home prices don’t go up forever.” The program in its entirety can be viewed here. It is definitely a must watch!
Others were less confident. In fact, well before the housing bubble burst, alarm bells were starting to sound among key players in the mortgage industry: due diligence underwriters.
Due diligence underwriters are paid by banks to assess the risk of buying mortgage portfolios. In the run-up to the crisis, they were among the first to suspect that loosening loan standards could pose a potentially catastrophic threat to the economy.
Several due diligence underwriters — most speaking publicly for the first time — told FRONTLINE correspondent Martin Smith that it wasn’t uncommon to see school teachers claiming salaries of $12,000 a month on their mortgage applications, or electricians moving from $500 a month in rent to homes worth $650,000. The only problem — their supervisors didn’t seem to want to hear about it.
“Fraud in the due diligence world, fraud was the F-word or the F-bomb,” said Tom Leonard. “You didn’t use that word,”
“You couldn’t say the word ‘fraud’ because we couldn’t prove that it was fraud. … Even if we suspected, we had to say, ‘This appears to be incorrect.’ You would never say, ‘This looks fraudulent.’”
And likely the reason (in many cases) that the word “fraud” was not mentioned is because the loan officers that entered the 1003 applications were told after 2005 that they could massage the program.
Before the 1003 software programs were systematically relaxed, a loan officer could only adjust the application data with the permission of a supervisor – after 2005 the Fannie/Freddie 1003 application program was apparently relaxed and loan officers could add, delete and alter the borrowers’ information until they received an approval without supervisor oversight. Click here for Behind the Securitization Curtain – 21st Century Mortgage Casino.
Many folks called mortgage brokers and provided information (mainly the social security numbers) over the phone and never signed an application form. Many homeowners report never seeing their 1003 application until they were signing their mortgage documents – if ever. There are also reports of the 1003 application forms filled out by hand by the borrowers turned out not to be the same as the ones the loan officers filled out and used. Often times, the borrowers were told to leave income lines blank so that the loan officer could adjust their income to fit the size of the loan.
Loan officers had various ways to stretch the income especially for the self-employed on stated loans. The borrowers’ business was allowed to pay expenses that could increase the borrower’s income and this was a generally accepted practice as long as it could be substantiated and verified.
Credit scores and willingness to pay were the primarily drivers of obtaining the mortgage loan from 2003-2008. If the appraisals had not been inflated – the housing market could have acted like a stock and people could have sold their homes if they got into trouble with their mortgage payments.
The fact that the appraisals were inflated and the promissory notes were rigged LIBOR short term interest rates making defective loans is evidence enough to make a logical assumption that the entire mortgage loan process was structured from the get-go to defraud the borrowers and the investors… and we should stop protecting the banks. Yeah, “somehow we just missed … that home prices don’t go up forever” … not when you rig the marketplace, Jamie.