A Banking Expert on the Mortgage Crisis

Subprime lending has many faces: the first time buyer reaching for a home of his/her own, a speculator riding the crest of rising real estate values, the real estate agent or broker discovering ways to close more deals, a homebuilder to liquidating inventory, Wall Street finding a plethora of new products, and more and more and more. All this based on credit standards that reached beyond credit guidelines proven safe over years of experience. In many ways the artificial exuberance of the dot com boom/bust is being replayed.

The scope of this crisis is so broad it has countries loosing substantial percentages of their reserves, world-class corporations taking multibillion dollar losses and homeowners losing their largest investment in record numbers not to mention a national recession. When does this insanity end? The answer has more to do with public confidence and jobs than litigation but the Courts will play a role and that is the opportunity for the financial expert witness.

In the past six months I have assisted with several mortgage lawsuits, including subprime loans, borrower identity theft, and fraud on both the borrower’s and loan officers sides. There is no one person or thing to blame. The following are typical crisis related challenges for the consulting expert.

Subprime lending, particularly Stated loans, where the lender accepts what the borrower claims as income, offers a variety of opportunities for borrowers and loan agents alike to obtain loan approvals that a more traditional underwriting would have denied. How and by whom the information or misinformation on the application was crafted is but one test for the expert. Others are: was the information reasonable, was there adequate supervision by the supervising loan broker, was the lender reviewing the loan package, was the reasonableness of the applicant’s information tested and numerous other issues in the underwriting, documentation, closing, servicing and securitization areas.

Identity theft is finding its way into the subprime market. In a recent case a creative agent was processing two loans simultaneously for two different borrowers on two different properties. One of the applicants was in great credit shape and the other did not have a credit history. The first applicant had good income; the other hardly enough to make payments. The agent placed the applications with two separate lenders but using the name on the credit worthy borrower on both. Both loans got approval, and the lenders who noticed the multiple requests for credit reports did not think anything of it, since an outside loan agent had submitted them. This was only discovered after the borrower with good credit wanted an equity loan and was turned down because she did not disclose all of her credit commitments.

Another hidden opportunity for the expert is with credit analysis by FICO Score. In a recent assignment a borrower sued his lenders for reporting his series loans to the credit bureaus. The litigant claimed the lenders reported his equity line and credit card accounts incorrectly since the information reported made his credit score drop. A look at the six credit reports in evidence showed a drop in FICO score, even though the borrower was making all payments in a timely manner. The reports also account balance limits often being violated, and when within the limits, over 50% of the account threshhold was being used. Both issues can dramatically reduce credit scores.

Residential mortgage lending is document intense. The numerous disclosures, valuations,and security signings can confuse the borrower as often as inform him or her. Misunderstandings can take place, and a lawsuit follows. The plaintiffs in a recent case swore they were to have a fixed rate loan despite signing documents titled ADJUSTABLE RATE MORTGAGE. They swore they did not agree to the payoff of their loan despite signing a two sentence letter agreeing to the payoff.

As this economic situation goes on, the need for experts who can explain the issues of financial regulation process will be needed.

The author is a Banking Consultant Expert Witness who has taken cases through the expert witness referral agency, Consolidated Consultants.  He has a background in banking, mortgage banking, credit quality, and commercial credit. For over twenty years he has served as an expert consultant and/or witness.