The Loan Originator’s Toolbox

That title seems pretty straightforward. I think most people would interpret that phrase to be one that refers to a number of useful elements of a loan originator’s success. Things such as extensive business and social networks, effective lead generation, customer service acumen, marketplace expertise, organizational skills, etc. would readily come to mind for many. Well, for a mortgage success self-help book, that would be a good start. In reality, that list is woefully incomplete.

In order to get the challenging loans approved, the toolbox often includes a high-quality, high-speed color printer/scanner, a reliable exacto knife, an array of various sized glue sticks, invisible scotch tape, plenty of white out and a steady hand. Given the penchant for strong drink in the mortgage brokerage business, the steady hand is the only challenge. Through effective use of the other tools, the facts and figures of any W-2, pay stub, bank statement, verification of rent or divorce decree can be easily manipulated to show whatever is required to get the loan approved. Furthermore, that’s not even getting into what is possible with a helpful (a.k.a. willing to take a kick back) inside person at a payroll service or a bank who will “play ball.” So elementary, it’s scary!

The Last Subprime Loan

I will never forget the last sub-prime mortgage that I originated and closed with my last broker. The client had a rather modest income with a poor credit score who needed 100% financing to purchase a condo. The income that the client documented was not enough to satisfy any debt-to-income guidelines set forth by any of the investors in the marketplace. Check that……ONE investor was willing to approve this deal. This investor was approving 100% financing down to a credit score of 600 using stated income for a W-2 wage earner. In a nutshell, stated income for a W-2 wage earner works like this: The income shown on the W-2 or year-to-date pay stub of the client is not enough to satisfy the required debt-to-income guidelines for the particular loan program. As a result, the loan originator is allowed to “state” the client’s income on the application. This simply means inserting a figure on the income line that brings the necessary ratios into an acceptable range for the investor.

In my opinion, stated income loans for wage earners were legalized loan fraud; legalized by the large purchasers of these loans that set the guidelines and approved of the practices. Who was I to question Lehman Brothers, Morgan Stanley, Chase, etc.? Looking back now, it is very easy to see how the whole sub-prime mess brought the mortgage industry to its knees. Hindsight is 20/20 vision!

Account Executives/Wholesalers

There is plenty of blame to go around when it comes to this mortgage mess. This post will examine the role of the account executive that works for the actual lender. To the mortgage broker, the account executive is a representative of a certain lender soliciting mortgage brokers in hopes of attracting business (loans) for their employer. On any given day, multiple account executives (AEs) will drop into the office or call the broker/originators in hopes of securing business.

In most cases, the AE is compensated based on the total dollars of the loans closed with their company generated from the brokerage firms in their book of business. Pretty simple, the more loans they close, the more they earn. On the surface, that seems like the compensation structure of just about any salesperson. The problem lies in the fact that the competitive nature of the business, coupled with the product (residential mortgage loans) being delivered leads to many egregious financial violations. It is in the best financial interest of the AE to “assist” the broker in getting a difficult loan approved. The AE was a master of the company’s underwriting guidelines and was willing to show the broker/originator exactly how to effectively manipulate the loan submission package in order to satisfy said guidelines. There is a shorter description for “effectively manipulating the loan submission package in order to satisfy underwriting guidelines.”

It’s called Loan Fraud!!!

Ghost Borrowers

One practice that I saw too much of was something I’ll call the “ghost borrower.” There was an originator in my past office that made some real good revenue off this practice. This is how it works: You have a number of, (at the time, subprime) borrowers who could not get a mortgage approval based on their own income/credit profile. The “ghost” then steps in and lends his/her credit worthiness to the transaction so that the loan closes with A-paper terms and conditions. In return, the broker kicks back an agreed upon amount of cash to the “ghost” for his/her efforts. In order to have enough money to pay all players, the originator charges exorbitant up-front fees and also maximizes his lender-paid compensation through manipulation of interest rate.

As if this wasn’t fraudulent enough, the broker would bundle a number of these loans using the same “ghost” and close them all within days of each other using all different lenders. Therefore, lender A doesn’t know that the “ghost” is also closing with lender B, C, D, etc. Furthermore, all the loans close with terms that apply to mortgages on primary residences, when in essence, they are all investment properties. The paperwork never catches up and the fraud is perpetuated with another “ghost.”

Purpose

The purpose of this site is to provide a fair and balanced forum for all topics related to the residential mortgage industry. I am a mortgage professional who recently left my position as a Senior Loan Originator with a medium-sized mortgage brokerage firm.

As a full-time, high producing originator, I was able to develop a number of close relationships with individuals from many of the other industries that interact with mortgage brokerage, as well as exist solely because of it. These individuals have provided a world of insight- good, bad and ugly, into their respective industries as they relate to mortgage brokerage. This has afforded me an in-depth understanding of all sides of the issues surrounding the recent mortgage meltdown.

Diligently reconciling all of this information in an attempt to encourage useful dialogue is one goal of this site. The other is to provide a helpful question and answer area, where I will personally respond to as many inquiries as possible.