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.
(Hat tip of Calculated Risk, Housing Wire)
UPDATE MATCH 28, 2008 5:35pm
Here is the actual memo, via JPM/Chase (I had nothing whatsoever to do with the font selection).
Download zippycheatstricks.doc
>
Previously:
The Ongoing Impact of the Housing Sector
http://www.ritholtz.com/blog/2007/08/the-ongoing-impact-of-the-housing-sector/
Tyler Cowen: “Predatory Borrowing The Bigger Problem”
http://www.ritholtz.com/blog/2008/01/tyler-cowen-predatory-borrowing-the-bigger-problem/
>
Source:
Chase mortgage memo pushes ‘Cheats & Tricks’
JEFF MANNING
The Oregonian, Thursday, March 27, 2008
http://www.oregonlive.com/business/oregonian/index.ssf?/base/business/120658650589950.xml&coll=7
Seattle Real Estate News
Aubrey Cohen
Seattle Post-Intelligencer, March 27, 2008 12:40 p.m.
http://blog.seattlepi.nwsource.com/realestatenews/archives/135190.asp
Citibank example from Mitch:
http://globaleconomicanalysis.blogspot.com/2008/03/dear-citigroup-customer.html
Are home owners the new smokers?
It seems to me that anyone who got caught with negative equity or too high a monthly payments is being viewed like a smoker with lung cancer; they should have known better.
Is that really appropriate?
Hmm… let’s see.. as far as the whole personal responsibility thing goes, that stops at finances, OK. Got you.
I wonder if Jerome Kerviel could help Chase with their internal controls?
You see, as a saver who didn’t lever up, I sort of resent the fact that the interest rates on all that cash I so prudently saved are at two percent, that my fair share of the deficit is going up – and is increasingly at risk – and that the economy is slowing because of people gaming the system.
Barry,
I think the odds are is that this e-mail being uncovered was an isolated “hit” on Chase as opposed to pervasive. (Or at least this particular technique is likely to be isolated) As some of the discussion elsewhere noted- moving income by $500 and small steps like that don’t do much, and the memo itself says the system can only be gamed in very small ways.
The stuff from Mish is much, much worse.
Got a friend in the biz and he said JPM is still underwriting loans with very loose terms. He said a mortgage just went down with zero down and 3.5x income. Jamie Dimon is the only banking exec I know that isn’t a clown but JPM is still a ticking time bomb with alot of private equity bridge loans, 100 trillion in derivatives and shenanigans like this. No one will escape this round of stupidity.
The really amazing part is it now seems the Fed is writing these same types of loans.
How much did you say these things were worth?…O.K., good… How about a 28-day ARM for that amount – unlimited rollover, of course….
Chase is still doing low doc loans, they call liquid express, where income is stated and assets are verified. Most of the other investors have stopped. With few to no buyers for these I have to assume they are holding in portfolio.
Can you say investor lawsuit?
JPM – “These AAA rated mortgage securities have been underwritten to the best of our ability. Don’t be scared of supposed “liar loans”, these are really for the self-employed and seasonal workers who have hard to prove income.”
Investors – “Dude! You told your scum-bag brokers how to cheat your own u/w system…GIVE ME MY $ BACK!”
Ridiculous…
Woah. This all makes sense to me now. I had “Stated Income” as a contractor for a Large, famously bankrupt telecom company…
In 2004, I opted to sell my Condo and purchase a house. When I went to Chase to get a loan from a man who seemed like a trusted loan officer (had been working up loans for the family for years) said “All I can get you is a 1/1 ARM” I was skeptical. I took it, because the house I found was perfect, better than our condo. I was LUCKY to have sold my condo at an inflated price and had more then 20% of the Home value to lay down on the table. Even WITH that money, I was STILL denied a 30 year Fixed. FYI—it was also an FHA insured Mortgage, which meant the home was actually AFFORDABLE. (I do Live in Baltimore City, Folks—were home prices inflated but not to DC standards)
Of course, rates started increasing and resets were looming. I wanted to Refi into a 30 fixed but they kept PUSHING me to take a cash out for “Improvements” since my house was 175 years old. (no matter that it had been completely gutted and rehabbed nearly 8 years previous.) I relented, did some homework and found out about a little known program through FHA that allows the holder of an FHA insured loan to “Streamline” their loan to lower a payment or change the terms. No cash out, no HELOC’s, just a change in terms. The loan officer scoffed and refused to do it citing that I wouldn’t qualify. I called BS, found another loan officer and had it done in less then three weeks. I refi’d into a 30 year fixed with no cash out. It was quick, painless and effortless.
I had to DO MY HOMEWORK and be VERY PERSISTENT to get this done, though. I can’t imagine what someone with decent credit who didn’t have an FHA loan had to deal with.
I thought JPM was the “go-to” guy for the Fed?
This is who is supported and rescued…
Yawner,
This isn’t isolated. Many of the proprietary AU (automated underwriting) systems of these lenders spit out ‘findings’ based upon compensating factors of the specific loan. Findings are essentially ‘conditions’ that must be satisfied prior to a loan receiving full underwriting approval, and given the clear to fund. Often times on Stated Income loans, the originator was rewarded with ‘doc relief’ for severely inflated figures.
When an originator ran a loan through any number of AU systems, the bank’s account executives would often times instruct him/her to enter the loan as “full documentation of income/assets” and significantly inflate the income. This would not trigger the ‘reasonableness test’ that most banks have internal controls on for stated loans. The condition just wouldn’t be there on the approval for the human underwriter to verify “is this income reasonable for this position in this region”, as it would be with a Stated Income loan. No joke.
Examples:
Borrower makes $100,000 a year, has $25,000 in assets, and has been on his job for 3 years. If “Full Documentation of Income” is tagged, the conditions on the AU approval will likely require the income to be verified via 2 years paystubs or tax returns, and all the assets.
Now, if you plugged the same loan characteristics in with $500,000 a year income, $750,000 in liquid assets, and 26 years on the same job, the AU approval will likely give you “doc relief” on the income – i.e. you don’t have to prove it.
It will also likely allow you to verify the ‘minimum program guidelines’ for the assets – probably 2-6 months PITI (principal, interest, tax, insurance).
Hence, by GROSSLY inflating the numbers on the AU system, it will see those high numbers as “compensating factors” to the Full Documentation, and give the originator doc relief. This was rampant in the system. The whole ideas was simply to play around with numbers in the AU until you got an “Approve/Eligible or Accept” with the least onerous documentation requirements. The ideas for how to do this weren’t thought up by the mortgage brokers – they were taught how to game the system by bank representatives. Unfortunately for everyone up the chain to WS and the end investors, the bank’s outside sales force was compensated by bringing business in the door – especially sub-prime – regardless of future loan performance. This led to a “do anything to get the loan done” mentality.
Apologies for the long-winded post, but I wanted to assure you that this is most definitely not an isolated case. I was the financier behind a branch that opened in 2002 run by a close friend, and these techniques have been common industry knowledge for years. We never even used Chase…
This brings into play another question that is yet to be brought to light: How many “Full Documentation” loans were closed in this manner – ‘Streamline, Fast-Track, Doc Relief”? Originators would get far better “pricing” (interest rate, bank-paid-compensation) for Full Documentation loans, and yet they’d have all the benefits of Stated Income. These time-bombs are out there, sprinkled into pools with with TRUE Full Documentation loans. They were tagged by WS as “Full Documentation” to investors in MBS, and yet the income was never truly verified…
The guys at the top will deny knowledge. Rogue mortgage brokers will be blamed. We need a law to hold corporate leadership responsible for crimes committed by their corporations.
There is much value in the old concept of “if it happens on your watch, you are responsible.”
We have watched, over the past decade or so, as our leadership has accepted “responsibility” without the attendant punitive cost of being responsible. Anyone would claim responsibility if there is no cost, socially and/or financially, for doing so.
The penalties should be harsh. I’m sure the new head of China’s version of the FDA is minding his Ps and Qs, as his predecessor paid the ultimate price for his economic/social crimes.
We are foolish to cast aside the wisdom of past generations.
Me: I’d like a mortgage.
Zippy: INSIDE, I have the same personality disorder as LUCY RICARDO!!
http://home.xnet.com/~warinner/zippy.cgi
In the post you’re somewhat vague as to how the “Administration” aided in perpetuating this scam. The recently disgraced Spitzer barely a month prior to his condeming article had this tto say, no wonder he was outed.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783.html?nav=rss_opinion/columns
Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.
What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.
Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.
Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.
In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.
But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.
The dominoes have fallen nicely for the Bush Administration.
Odd, no?
Quote of the day comes from James Lockhart, director of the Office of Federal Housing Enterprise Oversight, who comments on Fannie Mae and Freddie Mac:
The two enterprises have effectively become the mortgage market at this point,” Lockhart said. “Effectively they have become the lender of first, last and every resort.
http://www.bloomberg.com/apps/news?pid=20601087&sid=auf.z8vTOGeA&refer=worldwide
The URL above was truncated. Here is the link to the Bloomberg article.
The JP Morgan letter is funny and only surprising in how mildly JP tinkered with borrowers’ income. I audit mortgage loan files everyday for fraud, and it’s doubtful I would consider a $500 per month income variation a material fraud. Luckily, the borrowers’ incomes are overstated by $5,000 to $10,000 per month. Everything on my desk is either “stated income” or “no income” disclosure loans. For instance, here is a construction contractor who “stated” he earned $11,000 per month (WTF?). These loan files are so dirty, and everyone from the borrower, loan originator, and underwriter to the sorry SOB who was left standing with this crappy paper when the music stopped is at fault. While the memo from JP Morgan is surprising, just wait until a letter from Countrywide surfaces.
Huge market downleg about to begin…put/calls have come down enough to work off the oversold condition. New QQQQ short interest data shows still way too few shorts to trigger a squeeze, though Cramer is on CNBC all morning blaming shorts for everything. Remember, on 1/2/08, I posted on this blog that this would be the worst year in S&P history…I stand by that. Check out QQQQ short interest…use dropdown list to see all the top names.
QQQQ Short Interest
What you have to realize is that this kind of behavior has been the norm, not the exception. It’s as socialized a form of behavior as bribery is in some locations- strictly business as usual.
Given that a typical career tenure for front line Realtors and loan agents is about three years, we have a critical mass of people in the industry that literally don’t know how to do a transaction without fraud.
Zippy
ZIPPY….JPMorgan Chase has an automated system called “Zippy” for approving mortgage loans. But if it’s automated, how did it manage to approve so many crappy loans? An editorial in The Oregonian provides a nickel summary:As reporter Jeff Manning desc…
An interesting follow-up to this has been posted at CR.
This stuff is only coming to light now because the premise that house prices never go down is (finally) failing.
Silicon Valley price reductions are definitely coming. Just look at the price vs. rents in,
“Ah…the joys of owning”
http://www.viewfromsiliconvalley.com/id402.html
Thanks!
“Hmm… let’s see.. as far as the whole personal responsibility thing goes, that stops at finances, OK. Got you.”
Hmm… let’s see.. as far as the whole corporate responsibility thing goes, that stops at finances, OK. Got you.
As a customer, (and a saver who didn’t leverage either BTW) I deeply resent the fact that all responsibility is thrown at me, while financial service businesses have a open-ended license to attempt to screw me at every turn.
Do you know why standards exist? To make transactions easier and to provide a level playing field to ALL people involved. Why do you insist so much in tilting the scale in favor of business?
Be very careful of wanting to live in a mercenary society. One misstep and ooops! you’re in the ditch buster!
Who wants to live like that?
TheHolyFatman’s story makes it clear how the banks were complicit in the whole ARM mess and how they duped the less savy.
Not illegal, but certainly unethical.
Some borrowers were greedy (they saw others making it and wanted some too; not irrational behavior), but some saw their chance to move out of a crappy apartment in a bad neighborhood to give their kids a chance at not getting shot about the same time they started dating; that’s not irrational either. And when you are dealing with a loan broker, aren’t you hiring (supposedly) an expert to assist you? That would have been my starting assumption before this mess. We did our own diligence on our loan, but working from the starting point that the broker wasn’t a crook. Turns out that was a mistake on many recent borrowers’ part, but an entirely reasonable mistake.
This purely Republican mentality of blaming the powerless for the country’s problems has grown really tiresome. Remember when they were holding up welfare queens as a distraction from the S&L crisis? More of the same line that the people in charge aren’t responsible for anything, it’s always the bottom rung and their lack of fortitude.
In a nutshell, this was all the used car salesman mentallity. The underlying assets of the buyer and the underlying value of the asset to be sold were never a consideration. People will always cheat when they can. Granted, a small percentage won’t but they don’t represent the bulk of economic activity. There was a crime. The motive was profit. The means was liquidity. The opportunity was provided by the wall street firms bundling the “buck” to be passed on. Without wall street, none of this could happen. They have the blame and I won’t share it with them. Every top executive should be forced to pay the fed 60% of their compensation for the past 6 years if their firms were involved by act of congress. Tit for Tat, I say.
“As a customer, (and a saver who didn’t leverage either BTW) I deeply resent the fact that all responsibility is thrown at me, while financial service businesses have a open-ended license to attempt to screw me at every turn.” – Double that.
Is anyone surprised that financial institutions these days use these sort of tactics. They are grasping for anything they can get. And we are suppose to have confidence in this environment! It’s rotten from the top and it’s trickling down. Anyone that says they trust a banker, financial advisor, insurance agent, broker, real estate agent, isn’t facing reality and setting themselves up for a finanical hiccup. Sadly I think our system mainly works for billionaires (millions are so yesterday), like Trump or Oprah, because they can buy layers of professionals that work for them, and if they threaten to take their account away due to poor or unethical service, poor products, high fees, low interest rates, bad business practices, etc., it has real impact. The rest of us our just tiny replaceable widgets who hope WS will leave us some crumbs (its all relative) for our retirement, healthcare, education, and some quality of life.
The book, “Bull: A History of the Boom and Bust, 1982-2004” was an interesting read and
mentioned similar tactics.
Didn’t Adam Smith write that other book, “The Theory of Moral Sentiments”. ;-)
Let’s see, the Fed falls over themselves to monetize/socialize losses of depository institutions who are leveraged 20:1, who loan money to iBanks leveraged at 32:1, who then loan it to hedge funds running at 30:1 and mortgages with infinite leverage and no docs. You don’t even need Austrian business cycle theory to know that ain’t going to work out.
The biggest surprise to me, living near PDX, is that the Oregonian came so close to doing actual reporting.
“I’m shocked! I had no idea lending was going on in this establishment!” (Paraphrasing ‘Casablanca’ here if it wasn’t obvious.)
I’m reminded of when I got my current condo loan. Some kid 3 years out of college basically walked thru an enterprise mortgage program on his computer and in about 10 minutes the whole thing was done.
It was the lack of gravitas that I found odd. Some kid grants me over $350K based on 10 minutes communication with a mainframe on a network somewhere. It was all just numbers punched into a machine. It’s no wonder the system got gamed, that’s was it was for. . .
AGG, People will always cheat when they can.
Except your friends, I suppose? I spent 25 years in collections for a bank and no, people won’t always cheat. In fact, the opposite is true, but there’s little news value in people doing the right thing.
The sub-prime vehicles created a need for mortgages that by-passed traditional loan sources. Everybody could write mortgages o everybody did. This was a 3 way street.
If some mutt holds up a 7-11 with a squirt gun there are 10 cops ready to pounce.
If a wall street crime family steals $US 100 billion there isn’t a cop to be found.
«I spent 25 years in collections for a bank and no, people won’t always cheat. In fact, the opposite is true, but there’s little news value in people doing the right thing.»
What “news value”? Little people doing the right thing are suckers and losers who betray the American Dream. To be a winner it takes whatever it takes, and that someone like Cayne only wins $61.3m after creating so much wealth for so many winners is the really scandalous news. :-)
Thanks, ramstone. People forget that while Eliot Spitzer pretty much sucked as Governor of New York, he was a damn fine state Attorney General. He should have stayed there and let some other schmuck run for Governor.
This is exactly what happened to 40-50 plus people who purchased Las Vegas Cay Club properties in the last 2 years from Chase bank. There is now a task force looking into the loan office Ross Pickard since he inflated peoples assets on the HUD Statement and put down that the property being sold was a 2nd home instead of investment property. Chase needs to be held accountable for its employees.
One thing the Oregonian didn’t mention is that Zippy is merely the preliminary step — loans would still go to an underwriter next for detailed analysis and approval or denial.
They’re making it sound like loans at Chase were all done via this flawed system.
This is exactly what my Chase loan Ross Pickard did to me and many others that purchased Cay Club property in Las Vegas and Florida. You can read more about it at
http://www.flippingfrenzy.com/category/cay-clubs-resorts/
Chase needs to be held accountable for its people
I used to work with JPMorgan Chase here in San Francisco, and quickly moved up the corporate ladder. I started my career as a loan originator / loan officer, and within nine months was promoted to AVP, Ass’t Branch Manager.
Not only was this type of fraud common practice at JPMorgan Chase, it was also an integral part of their training curriculum. It was a system designed to secure as many loans as possible for the bank.
Essentially, this practice cost me my career at JPMorgan Chase, as I was one of the few who had any issue with this practice, and spoke out about it.
As a loan originator / loan officer, we were given direct training and instruction – from corporate trainers and our immediate managers – on how to manipulate the ZIPPY Underwriting System in order to have the automatic underwriting system approve the loan as stated income / stated asset (SISA). Not only was it common practice to continue to run the loan through ZIPPY with increased income / assets (often many times larger than the actual income and assets of the borrower), the ZIPPY results actually spelled out the issues of the loan, should the loan not receive an automatic underwriting approval, so the loan officer could ‘correct’ the application.
In ANY instance, you were told / allowed to run ZIPPY underwriting, fraudulently increasing income and assets – without the knowledge of the borrower – until the loan was within the correct underwriting debt to income ratios, and hence was ‘ZIPPY Approved’. At that time, the loan was packaged / processed by the originator and sent to a manual underwriter for entry into the system and for drawing docs. As the findings were ‘stated’, you did not include ANY income or asset documentation as proof of such income and assets. This is/was VERY COMMON PRACTICE in most lending arenas.
If you look further into the system, the mortgage crisis is the by-product of the banking system. All banks have such systems in place.
For instance, Bank of America uses the same system known as ‘Rapid Results’; Countrywide uses a system known as ‘CLOUT’; and even Fannie Mae and Freddie Mac use a DU/DO/LP system (desktop underwriter / desktop originator). All of the above mentioned systems allow for assets and income to be fraudulently mis-represented – unbeknownst to the borrower – to receive an easier and faster underwriting approval.
It is a very serious flaw in the banking system, and what I believe is the root cause of the current crisis. These systems were put into place by big retail banking giants and allowed – and dictated – fraud, making it an acceptable and common practice for banks / lenders.
Currently the mortgage broker industry is taking the heat and has become the industry scapegoat. As a broker myself, I understand and know that mortgage brokers are under much stricter guidelines than retail banking channels, as often our loans are underwritten and quality controlled by up to five internal banking representatives. This is NOT the case of a direct lending retail channel, and allows for much more fraud than a mortgage broker.
There will be much more to come on this subject.