NPR featured a story on Tracy Warren, an auditor at Watterson-Prime, a quality control contractor who reviewed subprime loans for investment banks before they were sold on Wall Street. (The biggest client of Watterson-Prime? Bear Stearns.) She has over 25 years of experience in mortgage lending and her job was to find bad loans and say no.
Warren says that when she’d reject (kick out) a loan, her supervisors would overrule her and the loan would be approved. She says that they’d justify overruling the kicks, yet the applicants clearly weren’t qualified, often with very poor credit scores or income that wasn’t verified and didn’t pass the smell test.
“I’d see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home,” Warren says. “If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense.”
She estimates that over 75% of the loans she rejected were overruled and were put in a pool and eventually sold.
Of course, the company is denying the allegations:
The loan-auditing firm Watterson-Prime’s parent company, Fidelity National Information Services, provided a statement. It says the company has no incentive to give loans a passing review if they fail to meet underwriting criteria and that it uses additional quality-control measures to further check up on loan reviews.
Obviously something went wrong in the loan review process. Mortgage lenders are supposed to have controls in place to make sure borrowers can make their payments: proper proof of income, realistic appraisals of properties, decent credit history.
And clearly, the investment banks (and the auditing companies they hired) had a financial interest in not doing their homework or in overruling auditors like Warren. And now who’s paying for that likely fraudulent behavior? Investors, taxpayers, borrowers, consumers in general.
And this isn’t an isolated case of shenanigans with loan reviews:
A bankruptcy examiner in the case of the collapsed subprime lender New Century recently released a 500-page report, and buried inside it is a pretty interesting detail. According to the report, some investment banks agreed to reject only 2.5 percent of the loans that New Century sent them to package up and sell to investors.
If that’s true, it would be like saying no matter how many bad apples are in the barrel, only a tiny fraction of them will be rejected.
Obviously, an agreement on the percentage of loans rejected means that it’s highly likely bad loans will go through. It’s kind of like saying that 97.5% of a class will get A’s no matter what. Who’s going to do their homework when even those who fail or don’t do the work will still get A’s?