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Due Diligence?

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Michael Tipton

Senior Member
Joined
Sep 25, 2005
Professional Status
Certified Residential Appraiser
State
Florida
Auditor: Supervisors Covered Up Risky Loans

by Chris Arnold

...

A big unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew they were selling garbage loans to investors. A wave of litigation is starting against these firms. One former worker whose job was to catch bad loans says her supervisors covered them up.

Mortgage Quality Control

Tracy Warren is not surprised by the foreclosure crisis. She saw the roots of it firsthand every day. She worked for a quality-control contractor that reviewed subprime loans for investment banks before they were sold off on Wall Street.

It was her job to dig into the loans and ferret out problems. By 2006, they were easy to find.

"I'd see people who were hotel workers saying that they made, in California, making $15,000 a month so that they could qualify for a $500,000 home," Warren says. "If a hotel worker is making $15,000 a month changing sheets at the Days Inn, everybody would want to do it. It just really made no sense."

Warren has worked in the mortgage business for 25 years, the past five in quality control. Most recently, she was a contract worker for a company called Watterson-Prime, which did loan audits for investment banks. She says their biggest client was Bear Stearns, which recently all but collapsed because of its exposure to bad loans.

Putting Bad Apples Back in the Barrel

Warren thinks her supervisors didn't want her to do her job. She says that when she would reject, or kick out, a loan, they usually would overrule her and approve it.

"The QC reviewer who reviewed our kicks would say, 'Well, I thought it had merit.' And it was like 'What?' Their credit score was below 580. And if it was an income verification, a lot of times they weren't making the income. And it was like, 'What kind of merit could you have determined?' And they were like, 'Oh, it's fine. Don't worry about it.' "

After a while, Warren says, her supervisors stopped telling her when she had been overruled. She figured it out by going back later and pulling the loans up on her computer.

"I would look every couple of days, and just see, if it was a loan that I thought was a bad loan, I'd go back and see if it was pulled."
About 75 percent of the time, loans that should have been rejected were still put into the pool and sold, she says.

'A Smoking Gun'

Some legal experts say it's a pretty big deal that people like Warren are willing to talk.

"This is a smoking gun," says Christopher Peterson, a law professor at the University of Utah who has been studying the subprime mess and meeting with regulators. "It suggests that auditors working for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street liability for aiding and abetting fraud."

Bear Stearns had no comment.

....

http://www.npr.org/templates/story/story.php?storyId=90840958&ft=1&f=1001
 

Randolph Kinney

Elite Member
Joined
Apr 7, 2005
Professional Status
Retired Appraiser
State
North Carolina
There were some people that worked for New Century saying the same thing. It did nothing to stop or help lessen the problem.
 

moh malekpour

Elite Member
Joined
May 25, 2002
Professional Status
Certified Residential Appraiser
State
California
A big unanswered question is whether the Wall Street investment banks that were packaging these mortgages knew they were selling garbage loans to investors
anyone who thinks they didn’t know what they were doing is purely naïve. They have used the brightest, the most intelligent Harvard graduate PhDs to come up with the formula of dispersing the risk. They knew what they had and what they were doing but they thought by dicing and slicing all those risky loans the risk would disappear.
 

Terrel L. Shields

Elite Member
Gold Supporting Member
Joined
May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
The thought process had to be something like..."Big deal. we know this one is garbage but its probably not going to be a problem and will refi down the road anyway. One here and there that's trash won't affect the overall 'great' portfolio that our experts tell us has a 0.002 loss rate."
 

Sid Pachter

Sophomore Member
Joined
Feb 26, 2008
Professional Status
Banking/Mortgage Industry
State
Florida
I am an in house review appraiser for a due diligence company. The comments in the artilce made by the QC UW do not surprise me. However one thing puzzels me and that is the overuling of her decisions by her supervisors. I cannot specifically comment on the operations at her company. At my company, our Wall Street clients had liaisons that worked with supervisors. Any loan that we recommended for denial or non purchase was reviewed with this liaison. I participated in many of these meetings when there were issues with the appraisal report where the market value estimate was not supported. If the client wanted to the loan in question included in a pool to be sold we could not argue-but we did have the client send us an email stating they understood our concerns but still wanted to accept the loan. Then at least out butt was covered.
 
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