Chase Mortgage leaked memo shows "cheats and tricks" used to give out unqualified mortgages
Chase caught with hand in the cookie jar:
An internal memo, explaining how to beat the Mortgage Loan Computer System (Zippy) at JPM Chase was leaked to the Portland Oregonian.Link, Link to leaked memo, Link to Barry's analysis (Thanks, Barry!)The memo gives advice for fooling the system to get otherwise unqualified borrowers approved for mortgages:
3 "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.
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That doesn't look like and official Chase memo to me. Looks like something informal that some employee sent around. Apparently she's been fired... GOOD.
Excellent discussion here:
http://calculatedrisk.blogspot.com/2008/03/more-on-chase-and-zippy-tricks.html
The guy knows his stuff and asks a superb question of Chase:
If this AUS [automated underwriting system] really does allow multiple resubmissions with increasing stated income each time without setting off the red fraud flags, this is a very big deal for Chase. I'm here to suggest that Chase's regulators need to look into that. As I said, given the chance that the memo is a "joke," it's possible that the thing [Chase's AUS] handles re-runs better than it sounds like it does. But Chase should have to answer this question now that the memo is on the table.
Isn't number 2 the "head shot" mortgage fraud charge that Lester Freamon had on Clay Davis on "The Wire", (had he been able to take the charges federal?)
Frankly the concept that an automated system gives you a go or no is just crappy. I can understand it being used as a tool to help the bank decide. If your rating comes back way in the NO category, obviously you have little to no chance. But if you are at the edge then doesn't not so common sense begin to kick in? I understand the bank doesn't want you to default on your loan, and them have to repo your house. But isn't that the checks and balance of the system? I don't want to loose my home....so I probably should only mortgage what I can pay. I guess logical thinking just doesn't work in the "real" world, with "normal" people. sigh...
BCXIZEMO:
The way the system is supposed to work is if you are at the "edge" you won't necessarily get a "no", you'll just have to pay a higher interest rate because the bank is taking on more risk.
The reason an AUS is vastly superior to a human is because you can program it to price the risk exactly how you wish it to. The problem is that individuals who enter the data may have reason to "game" the system because their financial interests (commissions) don't match up with the financial interests of the bank's trying to control risk.
That is why it is important for any AUS to have a method to determine if the system is being "gamed".
bcsizemo: The problem with using people to decide that sort of thing is that humans are far more fallible than you think. Even highly trained people take bad risks if left to their own devices. Research has shown that actuarial software makes the "right" choice far more frequently than humans. ("right" being defined as statistically safer)
Finance is exactly the sort of thing that computers are "good" at. This isn't medicine or music where there's a lot of judgment and gray areas. Money is pure numbers and math, and if you can't afford something, you really just can't afford it. People treating it as a gray area and something flexible is what causes mortgage defaults.
You live in a system where every individual is trying to get ahead by reporting dramatic results. It's a hype pyramid.
A few bankers saw a way to get themselves ahead, at the expense of the system and others, and they did it. It's sociopathic. But even more sociopathic is that people are now finding ways to profit from this disaster. Could it be that our society produces sociopathic thinking?
Oh yeah, this looks like a real memo.
Her email address is tammy.d.lish@chase.com?
And the word file was created by Bradd & Cynthia Newton?
Who would that be?
Check out this mortgage service:
Use the drop down menu and you'll find a Bradd Newton!!
http://www.cmgfs.com/broker/broker-request.html
And this Cynthia Newton worked at CHASE!
Not gonna be a good week for her...
http://www.linkedin.com/pub/6/2a7/314
It boggles my mind how many apologists for these large banking institutions exist on the web.
Now, I think it's good to be a critical, reasonably skeptical reader--something reported on the Internet should not be assumed to be true just because it supports your political or other beliefs--but the way that some people go out of their way to blame the victim is pathological. Strictly speaking, borrowers share some responsibility as contractees, but it pales in comparison to that of the entity with vastly more power and information.
I'm not saying corporations are inherently evil--that's just silliness. However, since they are institutions which exist for the sake of maximizing profit, and are also large bureaucratic organizations in which it is easy to displace blame, many employees will find themselves in situations where they find it easy to make unethical decisions because they are more profitable. That the higher-ups should "unofficially" encourage such behavior is not surprising (they, too, can pass off the blame).
As I've said before on this site, the problems are systemic. If we want corporations to act more ethically, we need to design regulations that give them incentives to do so (and disincentives for not doing so). I would say the same goes for individual citizens as well. This is why we have laws that assign punishments and rewards in the first place.
SPINOBOBOT:
I don't know what comments you've been reading, but it seems everyone agrees that mortgage brokers and agents shouldn't game the system or the AUS. Further, I think everyone agrees that if bosses are encouraging such things then they too are wrong. However, what the thoughtful folks are saying (and the anti business folks don't ever notice) that there are certain systems where the incentives are for acting in certain ways are different. A mortgage broker might have alot of reasons to sell loans to crappy customers, whereas a bank who holds the loans would have just the opposite incentive. Further, there are some banks who don't hold the mortgages so there incentives might be closer to that of the mortgage broker.
The complexity of the system is what makes it interesting to comment on. Why does every comment on BB have to be "evil bank president"? ... boring.....
I think everyone is pretty much on the same page. Like I said before, it should be a tool (and a smarter tool would be better). But at the same time with little or no accountability, what stops anyone from looking out from themselves? The mortgage crisis exists for that simple reason, greed. And like everyone else has pointed out, here, it is pretty easy to shift the blame around. And what does that solve? Nothing, the real problem still exists, and no one is taking the blame. If you are the CEO/President of a large lending firm that bet it's bank and lost then tough. Someone has to pony up, and it's 100% unfair for the government to be using my tax dollars to bail out a company (especially companies with CEO's that make thirty times my pay). In lesser legal (more organized) types of business these situations tend to have a way of working themselves out. Usually not in a very kind or painless way, but the problem is rectified.
You can use computers all day long to tell you something is a bad idea, but if the person who makes the decision is not accountable, then it doesn't matter. Maybe all transactions will be handled only by computers in the future. All hail SkyNet!
I worked in the real estate industry. It's standard practice to lie to get a mortgage. Lenders coach clients on what they need to say to get a loan. In defense of everybody involved, the rules for getting a loan are so stringent that nobody could qualify without lying. I had enough money in the bank to pay cash for my house and I still had to make things up to get a 75% loan.
RRSafety,
Given your comment history, it's a bit ironic for you to describe other comments as boring. You're a bit of a one note symphony.
RRSafety:
While the apologists have not been as blatant on this particular thread, they have often appeared on other BB threads (here, for instance), but I was also startled by some of the posters at Barry's site and how often he has had to defend individual borrowers. Hence my mention of the "web" generally.
Second, I specifically denounced the "evil bank president" meme as silliness. The problem is not evil corporations or CEOs. It has to do with the complex system you find so "interesting to comment on" which, unfortunately, is not so interesting for the individuals who have lost their homes as victims of predatory lending practices (which were allowed to flourish because of a lack of oversight).
They play these games on ordinary people and get a government bail-out when they mess up, the victims are left to fend for themselves!
Antinous, I don't believe you when you say that nobody could qualify for a loan without lying because I've never had a problem getting a loan. I don't make a whole lot, and sometimes I forget and pay a bill a few days late, but I've always paid my bills and never had any trouble with credit checks. But then, I've also never tried for a loan that I didn't already know I could pay. Has it occured to you that most people who have trouble getting a loan, just maybe, shouldn't be getting that loan? Remember, more people today own their house than ever before. A lot of the people crying about how tough it was to get their home loan today wouldn't even have rated a visit with a loan officer thirty years ago. But Americans don't want to hear that they can't have something they want. Greed didn't cause this mess so much as shortsightedness and immaturity.
Anyway, that's my crabby-old-man two cents. Time to go sleep it off...
Trust me. Your lender lied for you. I was in the business. Trusting your lender is like trusting a hooker when she tells you how big your dick is. The desire to believe swamps any available critical thinking skills.
Has it occurred to you that most people who have trouble getting a loan, just maybe, shouldn't be getting that loan?
Well, yes. That's the reason that we're spiraling into a depression. One of my friends who makes about $90K says, "Oh, I could buy a house. I just can't afford a house. There's a difference."
the person you talk to for a loan depends on loans being made to get paid themselves.
Yes, they get fired if loans don't get paid back.
Eventually.
They get fired even quicker if NO loans are made at all.
Don't they teach this in school?
Takuan,
I was in finance for too many years.
I averaged 35 loans a month, and was paid depending on size of loan, interest rate, term, and add ons such as insurance.
The more of everything the better.
It never came back to haunt me if clients couldn't pay.
But you are correct in saying that I would have been fired if I made less or no loans.
I worked with a former bank manager.
They had performance appraisals every year, and one year he only wrote off about $6,000 in bad debt.
He was very pleased with himself, but got chastised for being to conservative.
Had he made more loans, more would have failed, but more would have flown as well.
During that time, and even now, the bank is the last entity that will lose out if a loan goes bad. (Under normal circumstances)
If you have a mortgagee sale, the person who ends up carrying the can in the case of a deficit is still the borrower.
Banks collapse only when a large number of these people either refuse to pay, or cannot pay as is happening now.
The irony is the utter predictability of it all.
irony? nay. Read of the Roman Empire.
This sort of thing happens at every financial institution. Everywhere. All the time.
I wrote technical documentation for a major insurance company, and one of the products I documented was the actuarial software used by account managers to make a "go/no go" on policy issuance. It involved complicated actuarial models, with mathematics that would've looked quite at home on any physicist's blackboard. I had to dig into the program at the formula level, with the assistance of the actuary who developed the mathematics.
Basically, the account manager plugs in a bunch of numbers, the program crunches them, and spits out a result that determines whether the policy is worth the risk. Along the way, the program populates various fields with intermediate results.
One day, while working with the actuary on the documentation, I noted that most of these intermediate results could be changed manually by the account manager, who, incidentally, received a commission on policy sales. This meant that if the program produced a "no go" result, the account manager could tweak the numbers here and there at his discretion until he got a "go" result. I looked at the actuary and said, "So...basically, you guys are just making this shit up?"
"Pretty much, yeah," he said.
I remembered that conversation a couple of years later, when the company was in the midst of an SEC investigation. Insurance companies are required to keep a certain amount of cash in reserve to cover potential payouts...and the company was suddenly $500 million short. Seems they had spent most of the late 90s issuing policies that were bad risks, and then floated those losses using a complicated scheme I couldn't even begin to understand.
Heads rolled, golden parachutes were deployed, and the company was absorbed into its European parent. I'm not at all surprised that Chase has techniques for gaming its own software. It'll bite them in the ass, there will be a flurry of righteous activity during which no one in authority will suffer any real or lasting consequences, and then in a few years the whole thing will start all over again.
Wheee! High finance!
Smilkstein:
"What are the bugles blowin' for?" said Files-on-Parade.
"To turn you out, to turn you out", the Colour-Sergeant said.
"What makes you look so white, so white?" said Files-on-Parade.
"I'm dreadin' what I've got to watch", the Colour-Sergeant said.
For they're hangin' Danny Deever, you can hear the Dead March play,
The regiment's in 'ollow square -- they're hangin' him to-day;
They've taken of his buttons off an' cut his stripes away,
An' they're hangin' Danny Deever in the mornin'.
"What makes the rear-rank breathe so 'ard?" said Files-on-Parade.
"It's bitter cold, it's bitter cold", the Colour-Sergeant said.
"What makes that front-rank man fall down?" said Files-on-Parade.
"A touch o' sun, a touch o' sun", the Colour-Sergeant said.
They are hangin' Danny Deever, they are marchin' of 'im round,
They 'ave 'alted Danny Deever by 'is coffin on the ground;
An' 'e'll swing in 'arf a minute for a sneakin' shootin' hound --
O they're hangin' Danny Deever in the mornin'!
"'Is cot was right-'and cot to mine", said Files-on-Parade.
"'E's sleepin' out an' far to-night", the Colour-Sergeant said.
"I've drunk 'is beer a score o' times", said Files-on-Parade.
"'E's drinkin' bitter beer alone", the Colour-Sergeant said.
They are hangin' Danny Deever, you must mark 'im to 'is place,
For 'e shot a comrade sleepin' -- you must look 'im in the face;
Nine 'undred of 'is county an' the regiment's disgrace,
While they're hangin' Danny Deever in the mornin'.
"What's that so black agin' the sun?" said Files-on-Parade.
"It's Danny fightin' 'ard for life", the Colour-Sergeant said.
"What's that that whimpers over'ead?" said Files-on-Parade.
"It's Danny's soul that's passin' now", the Colour-Sergeant said.
For they're done with Danny Deever, you can 'ear the quickstep play,
The regiment's in column, an' they're marchin' us away;
Ho! the young recruits are shakin', an' they'll want their beer to-day,
After hangin' Danny Deever in the mornin'.
tommorrow morning, when wall st. wakes to find the national austrailian bank is writing off 90% of america's loans... i b'lieve the poop is gonna collide with the fanblades! welcome to the beginning of the end of this once great country, and our way of life. time to relive the 'great' depression. no more cake for you!
optimist!
http://www.alternet.org/workplace/92706/massive_economic_disaster_seems_possible_--_will_survivalists_get_the_last_laugh_/?page=entire