The former owner of a failed wholesale lender has authored a book that discusses his take on the causes of the mortgage meltdown. Among the culprits: mortgage brokers, appraisers, investment bankers and ratings agencies. Wholesalers, he wrote, were caught in the middle -- though they deserve a share of the blame.
Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse, written by Richard Bitner, offers one take on what was happening behind closed doors as the mortgage industry began to topple.
Bitner spent the last five of his 14 years in the mortgage business as co-owner of Kellner Mortgage Investments, a wholesale subprime mortgage company based in Plano, Texas. The company went out of business in March 2007, according to published reports.
Some of Kellner's former executives now run Dynamic Findings in Flower Mound, Texas. The firm operated with less than 25 employees, according to Jigsaw.
The 197-page paperback chronicled Bitner's first-hand experiences with brokers and big name lenders such as Countrywide and GMAC.
The author recounted meetings with shady brokers and keeps the book moving with stories of fraud committed by brokers, borrowers and lenders alike of varying degrees, and their motivations.
"About 30 percent of all subprime loan files require no manipulation or deception on the part of the broker because the borrower meets the credit requirements, documentation is readily obtainable, and the property values are easily justified," Bitner wrote. "Some brokers consistently operate with a high degree of professionalism."
But some do not.
Stretching appraised property values, omitting evidence that could cause a loan denial and doctoring essential documentation are just a few of the tactics used by deceptive loan originators, Bitner revealed.
There were the simple acts of fraud from borrowers too, such as declaring occupancy on a home when the intention was to rent it out. And then there were the varying degrees of fraud from "dysfunctional brokers," as Bitner called them -- the pushers, withholders and manipulators.
Pushers are those that either stretched the guidelines or always required a loan exception, these being the least harmful, Bitner wrote.
Withholders were just that, they withheld information that would cause a loan to be denied.
"For some brokers, withholding information is easier to justify than blatantly committing fraud," Bitner said. "If it's the difference between getting paid or not getting paid, brokers are likely to stay quiet."
Such as in the case of the couple who did not name the wife on the loan because of her poor credit, and the broker withheld the fact that they were divorcing and she would be in the house, paying the mortgage, yet not one payment was ever made. The house went into foreclosure resulting in a $75,000 loss for Bitner's company.
And then there were the manipulators. One broker tried to pass off a commercial building as a 6,000-square-foot home. The appraiser called it a single-family residence but the picture was taken from so far away it was difficult to tell, he explained.
By sheer coincidence, an acquaintance vacationing in the same area as the property location drove by it only to confirm it was a commercial building. The broker was caught red-handed.
"He spent a year gaining our confidence, making us believe he was trustworthy," Bitner wrote. "Faced with a chance to make a $15,000 commission, he finally showed us his true colors.
And in other cases, appraisers would stretch values using comps that were out of range or not as comparable as they lead the underwriter to believe.
"Appraisers rely on the lenders and brokers who hire them to make a living," Bitner said. "Allowing brokers to choose the appraiser, combined with the fudge factor, created a system that was vulnerable to abuse."
Bitner went on to explain the conflicted relationships of the broker-lender, the lender-investor and of Wall Street and the rating agencies.
"In some ways, the investment firm-rating agency relationship mirrors the dysfunctional nature of the broker-lender relationship," Bitner wrote. "If the broker is having trouble getting a deal approved, his account executive will tell him how to structure the loan. When an investment bank has a security filled with garbage loans, the agencies advise them how to structure the deals in order to maximize profit."
It is a conflicted system, Bitner wrote. Lenders are sandwiched between brokers and investors.
"On one hand, they answer to investors who care about loan performance and prepayment speeds," he said, noting that poor performance can result in the termination of the relationship. "On the other hand, lenders cater to brokers, a group whose only motivation is closing the loan. Since brokers have no financial interest in a loan's performance and face no liability, lenders must always question their actions and motives."
But he noted that while lenders were just writing loans that investment banks would buy, "there's plenty of blame that needs to be distributed and lenders deserve a share."
Bitner devoted a chapter to case studies of the creative financing methods brokers and account executives used to get difficult loans approved; leveraging income, using recent pay raises without a track record, removing borrowers with bad credit, etc.
He also explained the act of "credit enhancement," becoming an authorized user on an account held by a person with good credit. Although the borrower does not get access to the account, it is reported as good standing in the borrower's name -- hiking their credit score.
"While there is plenty of blame to go around, one conclusion is difficult to refute," he said. "The problems in today's housing market exist because the investment banks packaged high-risk loans into securities and the rating agencies assessed them as investment quality."
As far as solutions for this mortgage mayhem, Bitner says in a word, "it's accountability."
"The idea of holding investment banks that securitize mortgages accountable for their actions has promise," he said. "Any effort to extend liability to bondholders would mean the end of mortgage securitization as we know it."
Regarding predatory lending, the transparency of the upfront-mortgage-broker agreement would create a significant protection for borrowers, Bitner wrote, although he does not agree with limiting the amount a broker can earn.
And as far as licensing, a national standard for both brokers and loan officers is long overdue, he said.
"The solution is to hold all loan originators to the same standard, regardless of whom they work for."