Meet Tracy Warren. NPR says she’s not surprised by the mortgage meltdown because she was supposed to be in charge of preventing it. Tracy worked for a quality control contractor that reviewed subprime loans for investment banks before they were sold on Wall Street, and her company’s biggest client was none other than Bear Stearns. Tracy says she found plenty of loans to reject. The trouble is, according to Tracy, after she rejected them… her bosses unrejected them.
From NPR:
“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.”
Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.
Putting Bad Apples Back in the Barrel
Warren thinks her supervisors didn’t want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.
“The QC reviewer who reviewed our kicks would say, ‘Well, I thought it had merit.’ And it was like ‘What?’ Their credit score was below 580. And if it was an income verification, a lot of times they weren’t making the income. And it was like, ‘What kind of merit could you have determined?’ And they were like, ‘Oh, it’s fine. Don’t worry about it.’ “
After a while, Warren says, her supervisors stopped telling her when she had been overruled. She figured it out by going back later and pulling the loans up on her computer.
“I would look every couple of days, and just see, if it was a loan that I thought was a bad loan, I’d go back and see if it was pulled.”
About 75 percent of the time, loans that should have been rejected were still put into the pool and sold, she says.
NPR says Tracy’s story isn’t the only evidence emerging that points to Wall Street. According to one report, some investment banks agreed to reject only a certain percentage of loans — regardless of how many were actually bad.
Loan Auditor: Supervisors Covered Up Bad Loans [NPR]
(Photo: Getty)
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OK, so are we done with bare teeth capitalism without regulation? If not when?
Can somebody anywhere show me an example of when the free market forces have EVER worked. Ever!?
And I’m not talking about the free market of ipods, dell computers and livingroom furniture. I’m talking about the heavy duty real serious stuff. not ‘luxury’ items. that’s not a fair example.
As far as I know – which may very well be not that much – i have never seen market forces actually work. it ALWAYS ends the same way. “Somebody” takes it ALL. they take everything that’s not bolted down.
I’m not talking about communism here, I’m talking about regulation that prevents monolithic entities from pulling the rug out from under everyone else on the planet time and time again.
But I’m serious. When has market forces worked? aka Laissez-faire.
@BigElectricCat: When you should be going to jail on felony fraud, losing the home you never really should have been in to begin with and a hit to your credit rating is getting off easy.
@BigElectricCat: FL has already opted for the latter by passing one set of property tax cuts, amending the constitution via referendum for a second set and adding another constitutional amendment via referendum to the ballot this fall.
@pastabatman: Are you kidding?
Economist Joseph Schumpeter in 1942: “Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend them.
“It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to a rich man.
“Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”
(from cafehayek.com)
@cef21:
Oh, I’m not. Are you? SHOW me when it worked. When?
It brought silk stockings to the working class? that’s all you got?
How about electricity for the lighting. That’s an excellent one. Free market Electricity. Enron. Genius. they took it all and then some.
It works amazingly well for boots and pants because these are things based on simple supply demand rational actor stuff. Either you buy it or not. Either you get cheap ones or expensive ones.
Motorcars? Regulated. Why? because if we didn’t you would be driving around on a 2×4 with rusty nails if it were cheaper for the maker.
@jscott73: I’m a fan of “the double-oh’s”, myself.
But so far what I’m hearing most is the boring “two-thousands”.
It’s informative about the whole free market/enterprise system, promoted by corporate and political shills as if it’s some sort of natural law and ultimate good, that when mega-corps are threatened with the results of not being able to “compete in the market,” they expect government bailouts, tax-breaks, etc, etc. The US system has long been shifting towards corporate socialism and individual free enterprise.
Lobbyists constantly push for lower corporate taxes (already at all time lows), government exemptions from regulations, and all sorts of other rights for corporations. The oil companies make record profits year after year, yet still get all manner of tax breaks and other government gifts. We’re playing with two different sets of rules, one for corporations, one for individuals and small businesses. Until corporations have to play by the same rules as us “little people,” nothing will ever change.
@buckfutt: The borrowers didn’t always initiate the lying about their incomes; often the income info on applications was doctored by the lenders. And yeah, sometimes people signed off on statements that weren’t true, either knowingly or else just because they were dumb enough to trust someone else. But they can’t take all the blame.
@Wormfather: That stupid freecreditreport commercial is spreading misinformation. Your credit score won’t affect your girlfriend’s. Your credit reports and scores remain entirely separate after marriage. The only way info will be shared is on joint accounts. If you want to buy a house together, you might get hit (as you say) — but there are things you can do. If she can qualify to buy the house with her income alone, she should buy it in her name (you can be put on the title later).
Your finances do not automatically merge, contrary to popular belief. You are jointly responsible for debts you run up during marriage, but not for debts you had before marriage.
In fact, she may be able to help you build your credit back up, by co-signing on a credit card for you. Her good credit will help secure your card (and get you a lower interest rate than you could get alone), and you can build your credit back up by using and paying it off every month.
@Wormfather: I know how that goes with the (in my case, husband) with the good credit score and me being dead weight.
All in all, though, while Wall Street sucks and is very, very much at fault, you have to wonder at what point does the idea of entering into an agreement for more money than you’ll make in five or ten years pre-tax and an agreement in which the terms will change further input from you (re: ARMs) sounds like a good idea. For that matter, when does a loan of any form where you start off only paying the interest with nothing toward the principal sound like a good idea? When does lying about your income sound like a good idea?
As I said at an interview to become a financial planner, they really should teach basic personal finance in schools so that people can take personal responsibility for their financial futures and make plans to put them on the road to fiscal solvency. The interviewer replied, “Yes, but then we’d all be out of a job,” and we laughed.
I got a letter a few days later saying I’d failed my behavioral interview, for some reason. Hmmm.
@pastabatman: Most car safety features started off as options. Electronic Stability Control is the latest thing — it started off in Mercedes, BMWs and Lexuses. But, now Ford and Toyota have announced that all their North American cars would be equipped with it by 2009. They’re not doing it because of a government mandate — they’re doing it because it will help them sell cars. The free market at work.
I know a company that is developing artificial organs — it has already implanted a uterus in a mouse which has given birth, and functioning bladders in people. They’re working on a spleen. The founders profit motive means that now people who rupture their spleen will have a ready replacement, and fewer people will die.
There are millions of examples of the free market making the lives of everyday people better, not just the rich.
Ok, see the problem here is things aren’t black and white.
Even if a loan app was ‘doctored’, a hotel worker should realize “Hey, that’s a $500,000 house. I make $26,000 a year. That doesn’t sound right.”
Sure, the loan officer is guilty of fraud – but the applicant is complicit in being financially irresponsible, and shouldn’t be bailed out.
I’ve heard the argument before. “Well, if they wanted me to pay my bills, they shouldn’t have given me the account!”
I’ve heard this with financially immature people talking about all sorts of things, from credit cards, to cell phones, to their gas bill.
BOTH sides got caught up in the “Well, everbody’s doing it, so why shouldn’t we” thing. Word to the wise: that’s just musical chairs, and the music can stop at any moment. It’s still your problem if you end up in trouble.
A good article for people who think the loan applicants were blameless..
[articles.moneycentral.msn.com]
JScott73: Duly noted
To those of you who think walking away is a moral crime, remember that the lender and borrower agreed to a contractual remedy if the borrower can’t make payments — the lender will take possession of the house in lieu of full payment of the mortgage. Period. And in California, that’s a non-recourse loan — the lender can’t go after the borrower for the difference. It’s a purely business decision on both sides.
Seems to me here is the chain of guilt:
1. Borrower lies about income in order to get a mortgage.
2. Mortgage broker lies to borrower in order to sell them a high-fee high-commission mortgage. Mortgage broker doesn’t verify income either.
3. The credit rating companies that are supposed to vet these mortgages do nothing but just push these mortgages through.
4. Companies that issue these mortgages immediately package them and sell them as “good mortgages” to Wall Street banks
5. Wall Street banks – knowing these mortgages are crap – slice and dice these things into fancy “financial vehicles” that nobody understands. They are sold as safe investments to peoples all over the world.
6. Congress and/or the Fed ignore many early warning signs and do nothing to regulate the market because anything that smacks of regulation is viewed by the Bush Adminstration (and the Democratic Congress) as just one step shy of Communism.
And now we sit here.
@stanfrombrooklyn: I think you have a few facts wrong…
#2: fees generally weren’t that high. Commissions were nice, but most of the money way made on volume.
#3: This actually goes after #5 — the credit reporting agencies were supposed to rate the bonds after they were sliced-and-diced.
#5: They are sold all over the world. BUT, they’re generally only sold to sophisticated investors like banks and brokerage houses, which have the opportunity to do due diligence on the deals (and, in many cases do), but buy them anyway. Most are not sold as completely safe investments — they have varying levels of risk, but everybody understates that risk.
With regard to #6, Congress during the late ’90s actually made it worse by actively encouraging banks to make loans to unqualified borrowers, through things like the “Community Redevelopment Act” (basically, conditioning approval of bank mergers on the banks making loans to people in poor neighborhoods).
@Wormfather: Really? If something bigger is “realistic” (that’s what I read into this whole thread), then however did we survive when the average house was 800 square feet, as they are in my late-20s-era neighborhood? 1500-2500 square feet is perfectly reasonable for 2-3 people.
“Tracy worked for a quality control contractor that reviewed subprime loans for investment banks before they were sold on Wall Street, and her company’s biggest client was none other than Bear Stearns. Tracy says she found plenty of loans to reject. The trouble is, according to Tracy, after she rejected them… her bosses unrejected them.”
This is why libertarian “certification agencies” will all fail.
I used to be an Underwriter for a sub prime lender.(I quite before things went insane) and experiences like the one listed in this article were common place. All of the good (rational) UWs at my company made a stink about getting overruled on lending decisions, and having steaming piles of SH!T make it to closing. I personally had multiple loan decisions over ruled EACH WEEK. I would decline a loan for overstated income, for bad credit or what ever. Next thing you know, the Account Executive who had brought that loan in would take it to the Sales Manager, who would take it to an Operations Manager, and they would almost always approve the loan.
It really didn’t matter how many instances of fraud or over stated income, or bad borrowers that you found, the loans would get approved. I complained, and even looked into contacting people outside of the company. I honestly with I had.
Sales ran the place. What ever sales wanted, they got, at the expense of the investors, (who it looks like were just as stupid as my company) and ultimately the entire US economy. Sad. Really sad, and so avoidable.
Instead, after making several complaints, including some in writing, and having all of them ignored, I decided to look for honest work.
I’m now a Finance Manager for a not-for-profit. I go home and sleep well at night.
@tcp100: I agree with you up to a point. The financially resposible person will figure out there’s no way they can afford 1/2 million dollar house with an average joe salary. But the industry is in the business to squeeze every scent out of you they can. During the market’s hay day who didn’t hear that you could buy a house you couldn’t afford and then sell it a few months later with a 10% or 20% profit. The industry sold the idea and the media too. No, I’m not laying the blame on anyone other than those who got mortgages they couldn’t afford and those morons who thought nina loans were smart; but the young and niave were easy targets.
And I’m still scratching my head over banks and lenders who push that you should get a home equity line of credit. Unfortunately those peddlers are still prevalent.
Where I’m pointing my jaundiced eye next is the commodities markets. These markets are insane. It’s like the money that ran away from dot coms and ran to real estate are now running to commodities. Prices are over inflated for flour and rice and the rest of it. Yes, there’s legitimate worry over shortages, but the suppliers and the end buyers are all looking at the cost in relation to historic activity and they’re shaking their heads. Seems that there’s a plethora of index funds buying up and inflating costs as a speculative gamble in the commodities sector. It has the ear marks of another subprime meltdown. Unfortunately it’s going to squeeze everyone in the meantime and wreck havoc.
The sad part is, I had to do one of these creative loans. My previous company made me transfer states, but did very little to help me with the move. I was stuck with a house in one state and had to get another house in the state I was moving to. (Why we didn’t rent during this time is a very long and painful story)
So, I had to take an 80/20 loan. It’s not as bad as the ARMS, but I was forced to buy an over-inflated priced small home, way the hell out, and now after 2 years of occupancy, I’m now in the hole $55k based on ‘current market values’.
Who’s left holding the bag? Guys like me. I pay my mortgage (grudgingly) on time, knowing full well that I’m just throwing money into a black hole. I can afford my mortgage without a major struggle, but I sure feel like it’s getting me nowhere.
Now my family is rapidly expanding, and I would like to get a larger home closer to my new job. I’ve been told I can either short-sell and try to buy another house before it hits my credit, or I have to come up with at least 6% down plus the negative equity to get into a bigger home (yeah right). WTF am I supposed to do now?
Sure, I could walk away and be another statistic, but then where will that leave me?
I’m open to any suggestions. I looked at housing swap sites and I’ve even considered calling my mortgage company to ask about swapping for a foreclosure that I could fix up, provided it gave me the space requirements my family additions require. Sadly, I see no possible solutions and am stuck.
@pastabatman: Actually, commodity markets work well w/o regulation (except for anti-fraud or collusion, ‘natch). Open access, multitudes of buyers & sellers, transparency: it’s an economist’s dream.
It is, quite literally, the only market where laissez-faire economic policies function. The problem, naturally, is that the unwashed masses see it work in one limited case then want to apply it to everything else.
@Buran: Really? If something bigger is “realistic” (that’s what I read into this whole thread), then however did we survive when the average house was 800 square feet, as they are in my late-20s-era neighborhood? 1500-2500 square feet is perfectly reasonable for 2-3 people.
This begs the question of why the “market” isn’t creating homes of different sizes – 800-1000 sq. ft., 1000-1500, 1500-2000, etc. One size doesn’t fit all.
Or more likely, the housing market is becoming like the “rent to own” scam industry, set up to fail so the renters (one can rarely call them buyers) are never able to keep up with the prices. Instead of renting at lower rates, people are encouraged to waste their money on “mortgages” that they will never have the ability to pay off. By having houses of only one size, home seekers have no choice.
As much as I hate the lack of privacy my friends have/had, I think many Indian emigres have the right idea by putting an entire family under one roof. It’s much easier to save when everyone is sharing in the cost of one building, rather than people moving out when they’re 20.
@Trai_Dep:
THANK you…sometimes it seems like no one else GETS that…that “The Free Market” as they think of it is something that doesn’t work in most circumstances, and only barely exists.
@P_Smith:
Better to sell 50 large houses at a higher margin than 100 houses at a lower one. Also, seems like hardly anyone is building their own homes or having them made to order anymore. (I mean hell, people were selling just ANYTHING, why bother waiting…just build it and they will come, right?)
Sigh…at least in some neighborhoods where there are a lot of identical houses, as long as you don’t have homeowners’ associations homogenizing everything, things get individualized over time. There are a bunch of (old) houses on the same plan as my dad’s in his neighborhood, that look WAY different 25 years on.
So maybe there’s some hope for Henderson, NV and the like. I mean, in the meantime, I can just see someone staggering into a house drunk and getting shot because they MEANT to go to their identical house two doors down.
Fucking housing developers make my ass pucker.
@TechnoDestructo: Here, although we do have a couple of oversize houses that are larger than the surroundings, many of the homes here have been added on to or otherwise changed over the years instead of being knocked down. Mine is still its original size but the one next to it has been extended backward (so it looks the same from the street). A lot of them are remodeled on the inside; I want mine to be remodeled as well and I’m going to start thinking about that this year.
I think a lot of people fall into the “bigger is better” trap. I love my small (comparatively) heating/cooling bills that come from living in a small house, however, and if I can reclaim some space by finishing the basement and/or changing some of the furnishings and maybe expanding the kitchen some, it’ll be even better. 600-800 square feet is fine for one person.
@pastabatman: You’d be hard pressed to find a purely free market economy that works because you’d be hard pressed to find a purely free market economy that even exists. This “bare teeth capitalism” you speak of is hardly unregulated.
Whether or not pure capitalism works is something best left to the economic theorists, because pure capitalism (and pure anything, really) is pretty much solely relegated to the realm of theory. It barely exists in real life.
Sustainable housing! Maybe after the catastrophic depression this muck-up (along with the oil market fiasco) creates we can all crawl out of the ditch and live in proper houses.
Who really needs a den? C’mon, get over yourself…
If anyone wants to feel less depressed take a look at GOOD magazine’s article on the green housing dev ideas of the late R. Buckminster Fuller –> [www.goodmagazine.com]
I blame CarrotTop and those damn over-inflated muscles.
This American Life did a great show on 5/12 “The Great Pool of Money, which explains the whole thing: “Why did banks make half-million dollar loans to people without jobs or income? Why is everyone talking so much about the 1930s? It all comes back to one thing.”
This woman does not need to write a book, because it’s not some big secret that she’s unearthed.
At least the good news out of this are the people like me who work hard and save every penny (living at home unfortunately) can see the prices of houses and land drop down to a more realistic number and hopefully I will be able to buy one in a year or so.
Granted, I’m one of those strange people who believes in having more than 20% to put down on the mortgage but whatever.
@Buran: Dude, relax. All I’m saying is that some of us have different needs. We live in a capital society where we can purchase the best we can afford (if we like), we’re not pigion holed into someone elses opinion of our need.
My point: my fiancee and I are talking about children, she wants like 4, I want a dog (I know, talk about the negotions). Anyway it looks like we’re going to go with 2 kids and we already have a dog. Now we are going to want all of them to have they’re own room. That’s a three bedroom house right there. Then there’s the fact that she’s from the UK and we’d like to have a place for her sister, dad, etc to stay when they come over the pond. Four Bedroom house.
We both like to cook and work better together cooking in a bigger kitchen. Oh and we also entertain a lot.
We’re not doing all that with 1,000 feet, we can afford 1,800 so that’s what we’ll go with. Capitalisim FTW!
In closing, I understand that a lot of people on this site equate being very frugal with being a good consumer, this statement isnt meant for all of those people, but it should be noted that it is acceptable for frugality to give way to practicality, so long as it does not get in the way of financial solovency. That’s just my 2 cents.
And I’m sorry, but I’m not crammin
@Hambriq: But we know that socialism and capitalism doesnt work, that’s for damned sure.
@Buran: Disclaimer: I read your comments one more time and there is a chance that we aggree on semantics but not on principle.
@snowmentality: Oh that stuff I knew (I was an economics major). In fact I was explaining to her over the weekend that it may be more prudent for her to get to the loan and then add me to the title.
@bjarmson: “Corporate socialism and individual free enterprise” has a less awkward name: fascism.
@Wormfather: My point: my fiancee and I are talking about children, she wants like 4, I want a dog (I know, talk about the negotions). Anyway it looks like we’re going to go with 2 kids and we already have a dog. Now we are going to want all of them to have they’re own room. That’s a three bedroom house right there. Then there’s the fact that she’s from the UK and we’d like to have a place for her sister, dad, etc to stay when they come over the pond. Four Bedroom house.
How often do the relatives come over? How long do they stay? Unless it’s more than once per year and for weeks at a time, you’re paying for a room you’re not using. In terms of cost effectiveness, three rooms may serve you better.
Over the life of the mortgage and with the cost of the house, how much extra are you paying versus a three bedroom house? Then calculate how much it costs for a hotel room for the time of their visit. For example, if the difference in monthly payments is $200 and they stay for three weeks, at $100/night for a hotel it would actually cost less than the $2400 extra you’re paying for the mortgage.
Unless they’re coming often and staying for significant lengths of time, you may be losing money. And asking them to stay in a hotel that you pay for isn’t exactly an insult. Even renting an apartment for a month could be cheaper. I do that on holidays, rent for a month but stay 2-3 weeks. It costs a hell of a lot less than hotels.
Please remember this is a suggestion and a hypothetical situation, not an order. ^_^
@P_Smith: I presented the same theory to her but then after I regained conciousness, she reminded me that her sister comes twice a year, her dad is retiring and planning on comming over the states a lot more often, especially if we have kids. And then we have friends spotted over the US and typically they’ll stay with us when they’re in town. We do a lot of entertaining.
I explained that they could always stay in a hotel, we’re not required to house our friends, once the swelling in my lip receided she reminded me that if I didnt like it we could always put moving to the UK back on the table and let me tell you, in the south of England the people are great, the scenery is untouchable but the food is just outright atrocious. Oh and you only get 4 channels on the TV, FOUR! I cant go from 600 to 4, that’s worth $5K to me right there.
@cef21: “When you should be going to jail on felony fraud, losing the home you never really should have been in to begin with and a hit to your credit rating is getting off easy.”
Ridiculous. In the cases discussed at the start of this thread, there’s clearly enough malfeasance to go around on both sides. In fact, I’d wager that in many of these cases, the sales agents and mortgage firms acted in willing and knowing collusion with any ‘buyer fraud’ you might care to point out.
It appears to me that you haven’t bothered to read much of this thread.
@BigElectricCat: Well, it’s still fraud for the applicant to inflate income, etc, even if the sales agents and such told them to do so. People should realize they can’t afford a $500,000 mortgage on $2,000/month. That being said, I don’t think it would be really practical or wise to go after homeowners with fraud charges. There is probably no way to prove that they did it willfully, especially with all the cases of mortgage brokers actually altering numbers on applications, etc.
@johnva: “Well, it’s still fraud for the applicant to inflate income, etc, even if the sales agents and such told them to do so.”
It’d also be fraud if the sales agents and such *changed* the income figure on the application. Tales of that have been told here on Consumerist.
I find it telling that you’re torqued at the homeowners, but not at anyone else.
@johnva: “People should realize they can’t afford a $500,000 mortgage on $2,000/month.”
Sales agents should realize that, too. Don’t you think?
@johnva: “That being said, I don’t think it would be really practical or wise to go after homeowners with fraud charges. There is probably no way to prove that they did it willfully, especially with all the cases of mortgage brokers actually altering numbers on applications, etc.”
Precisely my point. You certainly seem hot to go after homeowners, but not quite so assiduous when it comes to the sales agents and mortgage brokers themselves. That’s why I said there was blame enough to go around.
@johnva: I don’t think were quite at the fascist state yet, though the Bush regime has certainly done all it could to move us in that direction. If we were, we couldn’t post this kind of stuff publicly without being hauled off in the middle of the night to be disappeared or tossed into concentration camps/gulags. Nacht und Nebel (night and fog) has yet to become the standard way of dealing with malcontents (to the consternation of hard-core bushites).
Economic damage by these thieves costs the economy billions of dollars. An armed robbery of 7-11 only costs about $20-40 and the robber gets 15-20 years. I think these sub-prime criminals should be water-boarded!
It seems to me that the Mortgage Meltdown issue has it’s roots in the justice system and it’s inability to cope with collusion.
Sure prosecuting some of the guilty parties (Banks applicants w/e) might teach some people a lesson, but it will not keep this sort of crime from happening again.
We need to change the cause, not the effect.
It may have been a lot more effective if she’d blown the whistle while it was happening…
I know a fellow who worked in the business in more or less the same job and is writing a book. His blog is [captaincapitalism.blogspot.com]
@B:
I like “aught.” I’ll have to start using it.
Cheers!