Who Caused the Problem?

Among all the words written about the sub-prime mess, one aspect has been totally overlooked: the rapacious loan officers.  In fact, they could easily be looked upon as the procuring cause of many of the problems.  All the talk in Washington D.C. about cleaning up the industry, I see nothing about changing any of the rules under which loan officers operate.

In the last 20 years Americans have had an opportunity to see corporate malfeasance up close and personal. Some are golden parachutes to high paid executives who screw up a company and then get paid millions as they are booted out the door. In other case, there has been systematic looting of the company treasury as in the cases of Adelphia and Tyco. I suppose Enron and World Com are in their own class.

In the mortgage business, I’m going to make the assumption that what goes on in the trenches is known in the highest corporate office. In the case of one large lender where skullduggery was discovered, the CEO, I will PRESUME, either knew about what dastardly deeds his employees were doing or, more probably, actively encouraged them, was sacked. He had the last say, however, and sued his company for a multi-million severance package he wasn’t paid.

I suspect that guy should have been in jail and here he is suing for millions from a company he had a singular hand in destroying. What a world!

In a tightly controlled environment like that of a typical bank, each level of management knows what is going on down one level. In addition, the bank employees likely get paid a salary that doesn’t vary with loan production.  Thus the system does not encourage tinkering with the facts so as to make more loans.

In the sub-prime lenders’ world and, more important, the mortgage brokers who fed loans to them, there was a direct incentive for the employees to get appraisers to fudge value to make bigger loans, and to exaggerate income on "no-income-verification" loans so as to get them approved and collect a commission.

In the cases of early-payment default where the borrowers never even made one payment, try to convince me that the loan officer didn’t know what was going on. If the borrower is going to lose his house anyway but if he can do a cash-out re-finance for as much of the equity as he can extract, does he care if the loan officer also makes an egregious commission? Why should he? From everyone’s perspective, the lender is a sucker and the borrower and loan officer are just taking advantage of the situation.

And I have not even gotten to the good part: who should the loan officer represent?

Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.