Caught Lying to Zippy
Since the beginning of the sub-prime crisis, anti-predatory lending advocates have pointed to how the egregious behavior of lenders and mortgage brokers have contributed to the crisis; their arguments recently found yet another anchor of evidence in the recently surfaced memo from JP Morgan Chase entitled “Zippy Cheats & Tricks.”
The nation's second-largest bank, Chase originates mortgage loans in addition to operating as an underwriter and funder of loans brought to them by a network of mortgage brokers. The memo instructs brokers on how to get their loans approved by Zippy, the bank’s automated loan underwriting system, explicitly suggesting that brokers inflate borrowers’ income or otherwise falsify loan applications.
While it’s easy to imagine various mortgage brokers scattered throughout the country engaging in the fraudulent practices that resulted in the crisis, it may be harder for many to imagine an FDIC-insured bank sanctioning those same practices. But it happened and though it hasn’t received much news coverage, federal legislators should keep the Chase memo at the forefront of their minds as they craft legislation aimed at protecting the nation from a repeat of the current fiasco.
The bank says that although the memo bears a Chase corporate logo and was emailed from Chase, it does not reflect the bank’s corporate policy. The Oregonian, reporting on the issue, commented:
“Even if the memo was penned by a single employee, it illustrates an
attitude prevalent in certain corners of the mortgage industry during
the boom years. In the face of sustained and significant home price
increases, much of the industry veered away from traditional notions of
safe and sound lending. Loan volume became as important as loan quality,
particularly for the rank and file typically paid on commission.”
After being forced to write down $1.3 billion in nonperforming mortgages at the end of 2007, Chase no longer makes the stated income loans (also known as no document loans and liar loans) to which the memo was referring. But while Chase waited for this inevitable lesson, thousands of families were induced to take bad mortgages and the taxpayer funded FDIC was tricked in to insuring a bank making consistently bad loans.
The existence of the memo is a powerful reminder of what many advocates have been saying for years: we need regulation that anticipates that even the nation’s largest and most respected lending institutions are all too capable of systematically manipulating their customers and lying to the federal government, which not only insures them, but is certain to bail them out when times get tough. They face unchanging and powerful incentives to be profitable; they need equally powerful incentives to be honest and ethical.
Comments (8)
Great post! Thanks and keep up the great work!! :)
April 3, 2008 5:31 AM | Reply | Permalink
But regulating is easier said than done, it's not a silver bullet.
These crazy black-box investment instruments are so wildly Byzantine that nobody can seem to figure out how they work, let alone how to institute effective oversight, short of having someone look over the shoulder of each i-banker's every transaction. And even if you do come up with a workable method, the problem of implementing it is further complicated by, fittingly, economics. People employed at these private financial institutions make scads and scads of money; those employed by public sector oversight outfits don't. How does one attract talent away from the exponentially more lucrative business of making money to the business of regulating the making of money? It's not exactly as if people pursuing advanced degrees in Finance are, as a group, constitutionally predisposed to impecunious public service/consumer advocacy careers.
April 3, 2008 6:57 AM | Reply | Permalink
If an instrument is to complecated to regulate it ought to be prohibited. Tranceparancy is good for all except the conmen.
April 3, 2008 3:58 PM | Reply | Permalink
Could a clever lawyer bring a suit against chase for fraud based on this? How about the FDIC filing a suit on behalf of the taxpayers? Chase denies the letter represented its corporate policy, but the letter was emailed from its offices and was on its corporate stationery. Shouldn't they be forced in court to show it really wasn't their policy? Or are the taxpayers who insure Chase simply supposed to accept them at their word (and bail them out)?
April 3, 2008 7:27 AM | Reply | Permalink
Woke up, fell out of bed,
dragged a comb across my head,
And put my tin foil hat on . . .
For a more nuanced view, see Tanta.
April 3, 2008 9:56 AM | Reply | Permalink
Zero equity commodity accounts for sale
Buying and Selling Housing Accounts as a Commodity
.
What Greenspan (and Paulson) euphemistically call 'mis pricing risk' by the nation's financiers is more aptly described as their collective purchasing of 90% to 100% leveraged commodity accounts.
At the end of the day, homes are a commodity. There are laws regulating the purchase and financing of commodities; there are strict margin requirements and lots of bold print that purchasing a commodity carries a high degree of risk, to wit, you may lose your shirt.
Having thought about this for a moment, the question becomes who in their right mind would set out to purchase someone else's commodity position which had little or no equity, just the position holders' promise to pay interest on the borrowed funds?
Buying and Selling Housing Accounts as a Commodity . What Greenspan (and Paulson) euphemistically call 'mis pricing risk' by the nation's financiers is more aptly described as their collective purchasing of 90% to 100% leveraged commodity accounts. At the end of the day, homes are a commodity. There are laws regulating the purchase and financing of commodities; there are strict margin requirements and lots of bold print that purchasing a commodity carries a high degree of risk, to wit, you may lose your shirt. Having thought about this for a moment, the question becomes who in their right mind would set out to purchase someone else's commodity position which had little or no equity, just the position holders' promise to pay interest on the borrowed funds.
If you are a bank that has access to buyers that accept the premise that housing always increases in value, then by all means, create or buy this type of commodity mortgage account, warehouse them and resell them. It's a business plan. I package and sell, you package and sell, just be mighty careful when the music stops because at that point the bankers own these crap assets that they intended to sell off to others. Merrill Lynch got caught and burned warehousing several billions.
Gold is a commodity which has the flavor of always going up but yet there are margin requirements. Housing, given that the number of buyers always increases and they ain't making any more land you know, seems a sure bet "over time." Near term however it's a commodity, subject to rises and falls due to interest rate changes, recessions, speculative fevers and inflation.
The banks, etc are idiots for placing their firms' equity in jeopardy by creating and holding no equity housing accounts. It's not wholly new however. The banks crashed with excess lending to REITs, Latin America and experienced some hemorrhaging from the tech bubble.
But. And this is a huge but as we head into an election year. Imagine if Mr. Bush had wooed America into placing social security assets into private accounts (because the stock market always goes up ye brethren.)
What would have occurred is that the housing speculation bubble would have lasted considerably longer as Wall St. packaged and sold retail strips of near worthless housing accounts to the nation's social security network.
At least recognize in this last greed driven market bubble or market fever fiasco that the finance industry has wiped out its net worth repeatedly over the last forty years. Keeping Wall Street's mitts off of Social Security should now perhaps be a subject for a constitutional amendment.
April 3, 2008 10:56 AM | Reply | Permalink
This is a great example of how poor ethics can be destructive to our economy. I took business ethics in business school, which was during the time when Ivan Boesky was making the news for insider trading. It is the same line of thinking that has infected our entire business and political systems. We think that if we can get away with it then it must be okay as long as it isn't hurting anyone else. I have found in my experience as a small business owner that our ethics teachings in business school are indequate and have simply taught us to justify more clearly that which we know is wrong.
One of my small businesses was a franchise. I won't say which, because after I bought it I uncovered fraud and ended up in a lawsuit with them, which is now settled. Right after I started operations an executive of the franchise chided me for attempting to comply with local regulations. He said, "Jim, that is entrepreneur 101, you don't let regulators know when you are violating a law!" The franchise's policy was to require me to operate outside of the law, and I was expected to comply with the franchise or I would be forced out. I was simply looking for way to comply, since I was personally responsible. The franchisor's attitude was that it was okay as long as I didn't get caught. If I get caught, I just pay the fines and continue. (the franchisor wouldn't pay the fines.)
This is why I argue that the system of values that we adhered to as a country in our birth were solid and should continue to be our values. Today, however, we have everyone arguing that what is true for you isn't true for me, and we all argue over individual ideals. This results in power struggles. The individual responsible for this memo justified his actions in his own mind because he obviously didn't believe the standards were necessary. How many of us do that in our own jobs? The implications for the soundness of our economic system is pretty scary. If we don't base our social and business systems on sound values, they will eventually degrade into anarchy. We can see it in action now, our country is divided and has been since the first Bush election. We are only fragmenting more, look at the current election campaign results. "A house divided against itself cannot stand"-Abraham Lincoln
More regulation won't solve this problem. A return to the values this country was founded on and reflected in our Constitution is the best solution. That starts in our schools at a young age and in our homes, teaching between right and wrong.
April 3, 2008 12:12 PM | Reply | Permalink
I put absolutely nothing past Reagan's progeny, today's Corporate Executives.
April 3, 2008 1:31 PM | Reply | Permalink