A Mortgage Underwriter's View of the Sub-Prime Crisis: Is Greed the Cause of the Current Mortgage Situation?

For the past 15 years, I have worked in the mortgage industry. I've been through many layoffs, mergers and unpredictable interest rates. But I have never experienced anything like the last two years. There's plenty of blame to go around for what has happened. As an underwriter, the one who decides if your loan is approved or denied, this is my opinion on why the sub-prime crisis is occurring.

Years ago, when I started working in the mortgage industry, there were few products and many guidelines. Basically we had fixed rate and adjustable products. The decision whether to make the loan was not automated. It was decided by a highly skilled and thoroughly trained underwriter. In many companies these employees were placed in secured locations so no one could disturb them as they made their critical decisions. For example, where I worked at First Union, you had to go through a secured lock to reach the underwriting department. Managers only had access to this area.

The guidelines during this time were tight. Most products required your housing ratio not to exceed 28%. This meant that your total housing payment could not exceed 28% of your total income. You were allowed 8% of your income for other payments such as automobile, credit cards, and child support, or a total back end ratio of 36%. This left 64% of your income for groceries, gas, insurance, clothes, education, entertainment, emergencies, etc. In most situations this was sufficient.
Several things changed and along with this underwriters were forced to change how we reviewed mortgage applications. Fannie Mae and Freddie Mac both developed automated underwriting systems. Since many mortgages were sold to them, they had their own guidelines, based on the performance of the loans they purchased. Underwriters were responsible for validating the integrity of the information that was entered, but they now shared the decision to approve or deny with the system. There were many times that I felt a loan should be denied but because the system had spit out an approval, I was forced to do the same.

The larger companies started to develop their own automated systems, each based on their guidelines and criteria. As this happened, the underwriters no longer worked behind secured doors but were placed in areas where everyone had access to them. There were some people who felt the underwriters thought they were God, and they wanted to remove us from our superior positions. Many of the mortgage companies started closing their local offices, and the large processing centers became popular. The underwriters were mixed in with the other workers so they could help with the automated systems as well as other training.
It was thought that the large production centers were more efficient but I always questioned that. Once the loans were removed from the local area you started to lose control over the whole process. When loans were handled locally the person at the bank often knew the company the applicant worked for, the appraiser, the title company, and all the players involved in the transaction. It's harder to lie about income if you know the person taking your application. It's harder to inflate property values if the person reviewing the appraisal drives by that neighborhood everyday.

At about this same time there were several major mortgage companies sued for discrimination. The complaint was that loans were being denied solely on race, sex, or other factors having nothing to do with capacity to repay the loan. I don't doubt that this happened with some underwriters. So the companies became more sensitive when loans were denied. The guidelines were relaxed in some situations, and the underwriters were expected to approve loans we knew were bad because the company did not want to be sued.

It has been said that mortgage companies are in the sub-prime mess because of greed. I am inclined to agree. The one originating the loan, or the salesperson, receives a commission for every loan they close. With many of the larger companies the commissions were high, and there were ways to make money on the front end and the back end. If an underwriter denied a loan, they received a visit or a call from the salesperson â€" since they were no longer in a secured area. A denied loan meant a lost commission. Sometimes, underwriters were even asked to call appraisers when the value came in low or even call a company if the income was less than needed.

As the word started to get out about the potential commissions a mortgage originator could make, many people decided they wanted to start their own companies. Mortgage brokers started to spring up on every corner. They advertised that they could give more variety and better service than your local bank. There are good brokers out there but there are also many driven by greed and profit only. The brokers were selling the loans they closed back to the mortgage companies. It appears to be a sensible, compatible arrangement but the more people involved the less control one has.

Many of the brokers were like the loan originators. They worked for commission, and every closing was critical to them. One office that I worked for in 1999, actually altered the documents (income and bank statements) if the applicant did not qualify with what was submitted. This is fraud. I only stayed there a short time because I was not willing to turn my head and ignore this. Years ago, when we typed all the documents by hand, using carbon paper, this would not have been possible. But today you can create any document you want on your home computer. If you can't, they are companies that will provide false tax returns, asset statements, and income documents, for a fee.

As the pressure to approve more loans in more situations increased, the guidelines started to change. The 28% and 36% qualifying ratios started to go up. In many cases well over 50%. As companies competed for larger market shares, they started to develop more loan products. The simple adjustable products were no longer simple. There were numerous kinds, tied in to various indexes, and different monthly payment options. I had always thought that arm products, meaning a loan that has a fixed rate for a certain time period and then adjusts to a different rate, were only appropriate in certain situations. Like those people not planning to be in their home for a long time, and certainly not for the senior citizen on a fixed income.

One company I worked with sold a cash flow product. The monthly statement included four different payment options. We struggled to understand this complex product. The option with the lowest monthly payment would eventually result in negative amortization for the borrower. I am sure that many of those with this product did not understand it either. For many of them human nature would be to pick the one with the lowest payment. Personally I don't think one should ever sell something they do not understand themselves.

Unfortunately, the commission for many of the arm products was higher than the commission for the fixed rate. Loan officers wanting to maximize their commissions sold products they could make the most money on, not necessarily what was best for the applicant. The underwriter might suggest a different product but typically we were encouraged not to do that. Many people had accused the underwriters of thinking we were God but in reality it was the loan officers that had all the power. Recognizing there would be no sales without a sales force, many companies did anything and everything to keep the applications coming.

Not only did the products change but the documentation requirements also changed. I'm sure there were numerous reasons for this. Many people had started to acquire more debt, and they did not qualify for the traditional programs. This was the beginning of the stated, no ratio and no doc programs. These loans were not submitted to the automated systems; instead the underwriter was responsible for determining if what was stated on the application was reasonable. Basically, you were approving or denying an application based on the credit report and appraisal. Their credit might be perfect but if they misstated their income there is a good chance they will default on the loan. It is very difficult to define the words normal and reasonable, but underwriters were expected to do this. Often for self-employed borrowers and on investment property, situations that can be risky to begin with. It is my opinion that these products are an invitation to commit fraud.

Many underwriters have felt that property values in some areas were increasing faster than they should be. All one could do in that situation was to request an explanation from the appraiser or different sales comparables. Years ago it was somewhat rare to deny a loan based on the property. Today it is much more common. One solution to properties not having sufficient value was to increase the loan to value ratio. There were companies lending 100% of what the property appraised for and even some that went up to 125%. What were they thinking? Underwriting has always been about risk, and as we approved those loans we knew it was a bad decision. But again no one asked our opinions and we were expected to approve whatever kind of products the company introduced.

Much of my mortgage career has been as an independent contractor. This has allowed me to travel extensively and work for various companies. Not only did many people feel that underwriters thought they were Gods, some believed that contractors were spoiled Gods. Because we were given a good wage, a per diem, a rental car and a place to stay, many thought we had the ideal life. But what they didn't always know was that we were often away from home three or four weeks at a time, worked long hours, had no benefits, and no job security. Typically we do not get second chances, very much training, and are expected to produce from the time we walk through the door. One mistake or one person that doesn't like us, and our job is over before it even starts.

Companies bring contractors aboard when they do not have the staff needed to handle their workload. During refinance booms many companies had critical personnel shortages. There were people that became contractors during this time that were not qualified to do the work. All they saw was the opportunity to travel and make good money. In addition to contractors, most companies also used local temps, many with no mortgage experience. When work volume increases, training and quality is not as important as closing the loans.

On one job that I did in 1999, I trained a local temp with no experience to be a pre-closer. At the end of my assignment, one year later, I learned that she had created a false resume and had accepted a job out of town as a contract underwriter. A company that I worked with in 2003, had such a backlog that we were instructed to close loans without the title work. We did since the directive came straight from the top. The title work was reviewed after the loans closed. The rationale was they were going to benefit from the huge volume, and they were willing to take the risk that some loans might have title problems.

Yes, it is my opinion that greed has greatly contributed to the housing crisis we are currently in. Though the mortgage companies, their employees, some appraisers, some title companies, dishonest investors, and unscrupulous individuals are to blame, in some cases the borrowers are at fault. They have continued to incur more debt when they could not afford it. Our society puts so much emphasis on material goods, and many times a person's status is defined by the neighborhood they live in. It should not be this way. In our quest to keep up with the Jones, many of us have overextended our credit. In an attempt to have it all, many are going to end up with nothing.

Sometimes underwriters get a bad rap because they do not want to approve certain loans. What many people do not know is that companies maintain records on the loans we decision. If we have too many bad loans, we are removed from our positions as underwriters. Even contract underwriters are guaranteed by the mortgage insurance companies we work for. If our loans default, they pay. That is the main reason most underwriters do not like being forced to approve loans we feel are bad. It's not that we don't want to make the loan or don't want the loan officer to get their commission; it's that we want to keep our jobs. I hope that companies will throw out all their records for last year because I think most underwriters far exceeded their quotas.