I used to work for a couple of small mortgage lenders a few years ago. We probably closed somewhere between 150 and 200 purchase and refi loans a month at the smaller one, and maybe 800 to a 1000 loans a month at the larger of the two. After working for mortgage brokers most of the eight years I was in the business, this was a big change
When you worked for a lender, your company owned the loan until it was sold off after closing. Which meant the owner of one of the lenders I worked for usually walked around as if he were on pins and needles, hoping nothing went wrong before he could get the loans we’d closed off of his warehouse line, which is a super duper credit line used mostly by smaller players in the mortgage lending industry
At another lender I worked for, which was run more like a stock market style bucket shop, the lowest rate any borrower could get was eight percent, back when prime rates were still in the low sixes. I had a borrower who had assumed the note on her deceased mother’s home in Atlanta, and wanted to refinance. She’d been a teacher in Florida, and had come to Atlanta the previous Christmas to wind up her mother’s affairs and move into the house. Her shaky credit, a small loan on a rental property back in Florida, and a six month employment gap during the twenty four month period used to calculate her qualifying income made her persona non grata to Fannie Mae and Freddie Mac loan guidelines.
She seemed to fit our lending guidelines, though, so I sent her file to underwriting. By the time the underwriter finished disallowing some of her income, we came up about $150 a month short of making our debt to income ratio requirements. The suggestion from underwriting was to wait a few months until the higher Atlanta teaching salary raised her average income and resubmit the loan.
The borrower was livid.
My manager was disappointed, but since we sold our loans in large bundles straight to the firms who securitized them, he insisted we had to meet their lending criteria.
The next thing you know, our firm was bought out by Novastar, and all of a sudden, my manager was at my desk. “Can you get that woman on the phone? We can close her tomorrow.”
This was less than thirty days after her loan had been in suspension.
The borrower was still upset, and had a schedule from hell, but the loan closer showed up at her house that night, and the deal was done. We didn’t submit any new paystubs, or any new explanations, or any documentation of newly paid off accounts. Her loan just happened to be hanging around when someone upstairs needed to close out our production on a high note.
At another lender I worked for, I had a borrower from rural Louisiana who was actually in great shape from a lender standpoint. Although his qualifying credit score teetered right around the low six hundreds, the house he wanted to refinance was owned free and clear. His wife had owned the home with her previous husband, who was now deceased. The borrower earned over a hundred thousand dollars a year managing some department in a nuclear power plant in another state. His 401(k) account, which we used as reserves, was well funded. They simply wanted to pay off all their debts. Cars, credit cards, installment loans, personal loans—every monthly bill they were paying would be replaced by a fifteen year mortgage.
The underwriting process went smoothly. The appraisal was conservative. The title was clean. The borrowers were diligent, responding to every request without a whimper within 24 hours. Final approval—“clear to close” in industry lingo—came back quickly. All we had to do was get the loan through our own internal audit department, which was where we ran into a problem.
One of our eagle eyed loan auditors spotted a miniscule discrepancy in the address on the appraisal and the address on the title. She wouldn’t budge, so I called the appraiser. He confirmed the address he had. Then I called the title examiner. He was sure the address he gave us was correct. We went back and forth with the title company who coordinated the title searches until their vice president stopped taking my calls.
So I went to our company president. The title company got the bulk of our business, so the president called, expecting to be treated like a valued customer. But it took a couple of hours of arguing with the vice president at the title company before we were finally able to get the title examiner to agree to go back out to this part of Louisiana and review his work.
It was almost the end of the next day before we got a call back from the title company. The title examiner had researched the title of the wrong property.
As it turned out, the borrower’s wife’s name, by a curious coincidence, was identical to her mothers. By an even more curious coincidence, the borrower had the same name as his wife’s father. And as fate would have it, only one lot separated their property from the wife’s father’s property, which was located on the very same road.
Since we were selling our loans back to the same major lenders who underwrote them, it’s very possible that this loan could have been purchased from us with title to the wrong piece of land.
I could tell stories like this all day. Multiply this by the number of loan officers who swelled the mortgage industry’s ranks between 2000 and 2008, and you’ve got hundreds of thousands of loan files that are likely to be ticking time bombs.
Guess where a lot of these same loan officers are now? Employed by foreclosure mills and foreclosure departments of lenders, who all needed lots of employees in a hurry who were familiar with loan documents to staff their operations. And many of them, including a few ex-coworkers I've talked to recently, have taken the same nonchalant attitude they had about guidelines and documents in the mortgage business right along with them to their new jobs.
Do not let the smooth taste fool you—when you see the inevitable congressional hearings that will come out of this foreclosure mess, I can guarantee you right now that the people who stand in front of the microphones will be lying. The entire mortgage industry revolves around the idea of a wink and a nod when it comes to playing fast and loose with loan documents.
The Obama Administration is in a real pickle on this one. Make any moves to dramatically alter the foreclosure process, or encourage judges to start awarding citizens across entire zip codes clear title to their homes because the banks have no idea who owns what, and they risk blowing nice big holes in the balance sheets of the very same Wall Street banks they just weaned off of the government teat. Turn a blind eye to it, and another one of our American ideals, the notion of playing by the rules, dies a little death. It is a real live domestic tragedy, one that makes Afghanistan look easy, which is why our punk-ass punditocracy will do their damnedest to avoid turning this into a real story.
I don't hate the mortgage business. When it paid it paid well, and when it didn't, it was entertaining as hell, because every loan is a story, and every loan officer is a storyteller. But mortgage lenders deserve exactly what they are getting these days.
This is what happens when you turn former bag boys at your local supermarket loose with a mortgage rate sheet without any real training, or any real understanding of how serious their role is in the mortgage food chain, and tell them they are bona fide loan officers. This is what happens when you fight every legislative effort to regulate your industry, until the agencies who are supposed to keep the good lenders honest and put the bad lenders out of business lack the manpower and the legal authority to punish mortgage lender wrongdoing.
This is what happens when an entire industry forgets that a loan is just not a stack of papers in a file folder, but a critical part of a family’s financial future.