Three “handy steps” for getting a questionable loan approved by JPM Chase’s automatic system:
1. Lump all of an applicant’s compensation as the applicant’s base income,
rather than breaking out commissions, bonuses and tips.
2. Do not disclose use of gifts for down payments.
3. If all else fails, simply inflate the applicant’s income. “Inch it up $500 to see if you can get the findings you want. Do the same for assets.
Thus reads an internal memo from Chase obtained that accidentally found its way into the hands of journalist Jeff Manning of The Oregonian. It was the basis for an article titled, Chase mortgage memo pushes ‘Cheats & Tricks’.
Fraud has been a frequent theme of ours regarding Housing during the Boom, circa 2001-06. From appraisal fraud to the payola of the Ratings agencies, the entire system has been corrupted. Some will act as apologists for the worst tendencies of the banking industry, and others may debate who is to blame. We long ago reached a verdict as to where the culpability lay.
Anyone with even a modicum of experience in the mortgage industry will confirm the rampant disregard for lending standards and the corner cutting and shortcuts that were all but official corporate policy during the boom years. There was headlong rush to originate, process and securitize mortgages — and the ability to repay the loans be damned. (Predatory Borrowing my ass!)
Exactly how deeply this attitude was in the business of making loans was revealed by this memo. It involves Zippy, Chase’s in-house automated loan underwriting system.
The memo’s title: “Zippy Cheats & Tricks.”
It provides a rare glimpse into the corporate mentality that has been a key factor in the current mortgage crisis. (A Chase spokesperson denied that Zippy Cheats & Tricks was official policy; thus we are reassured that this was only “unofficial policy).
Here’s an excerpt from the Oregonian:
“During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.
Chase, the nation’s second-largest bank, originates mortgage loans itself but also operates a wholesale arm that underwrites and funds loans brought to them by a network of mortgage brokers. The “Cheats & Tricks” memo was instructing those brokers how to get difficult loans approved by Zippy.
“Never fear,” the memo states. “Zippy can be adjusted (just ever so slightly.)”
The Chase memo deals specifically with so-called stated-income asset loans, one of the most dangerous of the mortgage industry’s innovations of recent years. Known as “liar loans” in some circles because lenders made little effort to verify information in the borrowers’ loan application, they have defaulted in large number since the housing bust began in 2007. . .
The Chase memo is “a perfect example of one of the big five banks out and out telling mortgage brokers to commit fraud,” said Todd Williams, a broker with Evergreen Ohana Group in Portland. “And this has been going on for years.” Williams and other mortgage brokers gave a copy of the memo to Oregon financial regulators.”
Three other facts make this story incredibly intriguing:
1. State regulators recognized signs of fraud early on, but attempts to curtail it were prevented. The White House asserted that it was the Feds — and not states — that have jurisdiction over federally chartered banks.
And the Feds? They did nothing until 2008.
2. Tammy Lish, a Portland, Oregon account representative for Chase, accidentally forwarded the memo by email. Chase fired her days after discovering thisl.
3. Chase no longer makes any stated-income loans; the bank wrote down $1.3 billion in nonperforming mortgages in 2007.
The entire episode is amazing. I expect that more and more of these smoking guns will be finding their way into public view. Perhaps we can ask the Oregonian to make the actual email available online.
UPDATE MATCH 28, 2008 5:35pm
Here is the actual memo, via JPM/Chase (I had nothing whatsoever to do with the font selection).
The Ongoing Impact of the Housing Sector
Tyler Cowen: “Predatory Borrowing The Bigger Problem”
Chase mortgage memo pushes ‘Cheats & Tricks’
The Oregonian, Thursday, March 27, 2008
Seattle Real Estate News
Seattle Post-Intelligencer, March 27, 2008 12:40 p.m.