Subprime Lending Tactics Exposed
By: Gerri L. Elder
The collapse of the housing market and subsequent foreclosure crisis has left many Americans scratching their heads and wondering how this mess happened. While there are many contributing factors, a huge part of the mortgage mess was caused by a tremendous amount of risky home loans. A memo from JPMorgan Chase has recently been uncovered that may shed more light on exactly how so many bad mortgage loans were issued.
The memo is titled "Zippy Cheats & Tricks" and is a how-to guide to get risky mortgage loans through Chase's in-house automated underwriting system. Some secrets to getting Zippy approval included inflating the loan applicant's income and falsification of assets on the loan application.
The text of the Chase memo appeared on The Oregonian website. The original document reportedly included a Chase corporate logo, but The Oregonian reported that it is not known how widely the memo was circulated or how often the tactics were used at Chase.
A Chase spokesman has said that the memo was emailed from Chase and an investigation is ongoing. The Chase employee who emailed the memo has been fired and the bank says that the tactics outlines in the memo do not reflect Chase corporate policy.
During the housing market boom, the volume of loans was very important to mortgage lenders and especially brokers who were paid on commission. Much of the mortgage industry strayed away from sound lending practices, and risky subprime loans with high interest rates were worth a bundle on Wall Street.
Chase is the second-largest bank in the country. While Chase does originate mortgage loans, it also operates a wholesale division that underwrites and funds loans from a network of mortgage brokers. The Chase memo appears to be instructions for brokers on how to get the more difficult loan applications past Zippy.
The "Cheats & Tricks" memo specifically deals with a type of mortgage loan called the "stated income asset loan." This type of high-risk loan has a very high default rate, as lenders did not waste time verifying information on the applications. As a result, borrowers could simply state inflated incomes or have it done for them by brokers in order to qualify for loans that they could not actually afford. These loans were all but slated for future foreclosures, but in the mortgage-lending heyday no one seemed to mind. Borrowers were getting the homes they wanted and brokers were making insane profits. What could possibly go wrong?
What went wrong was that the stated incomes were fraudulent and as these adjustable rate mortgages (ARMs) matured, homeowners could not afford their mortgage payments at the new rate. Home values went into freefall and the properties were no longer even worth the amount of money that the banks lent; thus a nationwide foreclosure crisis began.
Chase and other lenders have now stopped making mortgage loans based on stated income and assets. Most mortgage lenders now require full documentation of income and assets in order for borrowers to be approved for mortgage loans. So perhaps if the mortgage mess gets straightened out, there won't be another foreclosure crisis looming on the horizon.