Here is a story about an internal memo from a major bank that was leaked out to the public, and to the media. It was a primer on how to trick the internal underwriting software into liberally approving loans that may not pass muster with a human underwriter. Such programs will provide a fast track to closing that essentially bypasses the human “manual” underwriting effort. The secret? Inflate the applicant’s income to make it look so “over-qualified” that the underwriter doesn’t even ask to see proof of income.
I know, I know. Just read the article. This represents an investment appetite well out of touch with risk assessment, and is symptomatic of an exuberant market. I’m not a huge fan of the ‘media tint’, especially with their ability to adequately report on the credit crisis, and this is no exception. There are misrepresentations, and the media loves to portray the entire industry as deliberately trying to hurt consumers. Keep in mind, banks don’t benefit when they write loans that go into default. Even though they often transfer the liability through securitization into the secondary market, they still have rating agencies , shareholders, and reputations to answer to. Granted, there were flaws all up and down the system, but that’s my point. The banks were not looking to make stupid investments so they could deliberately cause people to buy – and then lose their homes. They got carried away much like the borrower who signed their name to the application with bogus data got carried away. All based on the expectation that the home would keep rising in value. Economics.
