Riding the Sub

By David F. Carr  |  Posted 2005-09-09 Print this article Print

No mortgage loan gets made without a processor; and no processor makes a loan without running the applicant's personal and financial background through software that can—in theory, if not in practice—reject those borrowers who can't legitimately

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As interest rates fell to a 40-year low in June 2003, large lenders such as Ameriquest began advertising loans for potential borrowers "regardless of their credit histories."

Ameriquest and other lenders offered interest-only loans, to entice borrowers to purchase second homes or to qualify for higher-priced homes they otherwise could not afford.

As one mortgage industry veteran in New York puts it, "Anyone who can fog a mirror can get a mortgage loan in today's environment."

Because these loan agents are relying on and, in some cases, abusing the information systems used to generate the loans that have made the real estate explosion possible, they also stand to share much of the blame if and when these risky loans begin to foreclose, says Richard Harmon, vice president of scoring analytics and software for San Francisco-based LoanPerformance, a firm that specializes in developing analytical software for the mortgage industry.

"It's always dangerous to paint issues of this type with a broad brush, but it's clear that more and more people are leveraging themselves to the breaking point," Harmon says. The danger is particularly great in overheated markets, such as California and Florida.

It doesn't have to be this way. The software systems that mortgage brokers use are capable of weeding out applicants with shaky financial backgrounds. But if the same software is used to fulfill sales quotas, these systems can simply make it faster to fill out unverified reports.

Empower, for instance, automates almost half of the steps needed to process a loan. Once the application has been filled out by the borrower, the data is keyed into the system. Loan agents can enter that data directly while talking to the borrower or, in some cases, without their consent, according to Bomchill.

At the underwriting stage, the loan is passed along for review by the underwriter to determine the viability of the borrower and recommend approval or denial of the loan.

In the past, the loan application and supporting documents such as W-2s, bank statements, 401(k) statements and other financial records were kept together in one file for review.

Now, all that documentation is entered electronically at the beginning of the process by the loan agent. In some cases, the underwriter is merely reviewing the data entered into the system by the loan agent and not double-checking the actual physical documents, Bomchill says.

These steps and processes, if done properly and with proper supervision and documentation, speed up the transactions for all parties. But in some of the cases detailed in the class-action suits Ameriquest recently settled, many of the appropriate checks and balances appear to have been ignored.

Ameriquest CIO Mark Sarago says the company's information systems are designed to ferret out abuses, but he declined to offer any specifics.

"Are there ways for anyone to do anything to the software? Yes," he says. "If someone is entirely enterprising, they can find ways to beat the system. If someone really focuses on breaking something, I'm sure they can do it. But we think it's a very tight system."

Story Guide:

  • Ameriquest Home Loans: Cracking Under Pressure: Even in a fertile market, it's possible to set your sales goals too high.
  • Loan Rangers: Ameriquest became unusually successful digging up loan candidates others may have overlooked.
  • Settling Up: Ameriquest's hard-sell tactics worked but, say investigators, violated a series of consumer-protection laws.
  • Riding the Sub-Prime Wave: As the house market heated up, borrowers stretched themselves to foreclosure-threatening lengths; and lenders helped them.
  • No-Touch Funding: Believing in your applicants can go too far, and get you both in trouble.
  • Who's to Say: Automation was supposed to make loan approvals faster, easier and more accurate; did the system fail, or did the officers handling the loans?
  • Tighter Controls: Making requirements stiffer only works if enforcement gets tighter as well.
  • Penalties for Abuse: Ameriquest denies wrongdoing, relies on IT for process improvements, and may face penalties in the hundreds of millions from class-action suits.
  • Avoiding the New Restrictions: It's one thing to let borrowers overextend themselves; it's something else to deceive them into doing it.
  • Ameriquest's Business, By the Numbers

    Next page: No-touch funding.

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    David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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