Dick Lepre is senior loan adviser for RPM Mortgage of
Alamo, California, a division of LendUS. He has been in the
mortgage business since 1992 and has been writing a
weekly e-mail newsletter on macroeconomics, mortgages
and housing since 1995. Lepre (NMLS #302379) is from New
York City but has lived in the San Francisco Bay Area since
1968. He has a degree in physics from Notre Dame. Follow
him on Twitter @dicklepre. Reach him at (415) 244-9383 or
Lessons from Lehman
Brothers 10 Years Later
Watch for these signs to guard against a repeat
of the financial crisis
By Dick Lepre
Later this year marks the 10th anniversary of the bankruptcy of Lehman Brothers. The mortgage mess had been brewing long before, but the collapse of the financial
services company was the focal event of the crisis,
which came to be known as the Great Recession.
While it is unlikely that bad mortgages could lead
to something quite on that scale anytime soon, mortgage originators should be the professionals who see
this coming. What then would be the signs that this is
The single largest cause of the mortgage meltdown a
decade ago was the fact that Wall Street investment
banks became so adept at bundling and selling mortgages as part of investment-grade securities. These
banks created a market for low-quality mortgages, creating pressure for more and more lenders to lower their
underwriting guidelines to accommodate the demand.
If lenders are again encouraged to lower their guidelines to accommodate any new-found ability of Wall
Street to sell anything, the mortgage mess will reoccur.
Experienced people in the mortgage origination business know what constitutes a loan with a low risk of
default and must resist compromising on that measure
for essentially a short-term gain.
The Wall Street people who created the investment
instruments that enabled bad mortgages to become
part of investment grade securities not only did not
know what constitutes a loan with low default risk, but
they seemingly did not care. One consequence of the
financial crisis is that many of these investment banks
have since been merged with commercial banks and
are now overseen by the Federal Reserve. This is both
good and bad. On the positive side, there should be
better oversight. On the negative side, the next Lehman
Brothers will be part of the banking system and less
easily disposed of in the event of a failure.
One cause of the 2008 financial fiasco was the vast expansion of the number of people who could borrow
money to buy property. There are at least two things
already happening that are allowing people to obtain
loans who would not previously qualify.
One was instituted by the Consumer Financial Protection Bureau last year, which persuaded credit
bureaus to remove most civil debt liens and tax liens
from credit reports. The Wall Street Journal estimated
this would improve credit scores for 12 million individuals, some by as much as 40 points.
Another is the expansion of Fannie Mae’s Home-
Ready program, which is aimed at low- to moderate-
income borrowers. One of the features of the program
is its liberal interpretation of income, which allows
lenders to consider the income of nonborrowers living
with a borrower — such as adult children, friends or
extended family. That nonborrower income can be
viewed as a compensating factor in the loan-approval
process for the program.
HomeReady is similar to the National Homeownership Strategy of 1995 in that it has a social goal. Under
the Federal Housing Finance Agency’s housing goals
for Fannie Mae for 2015 to 2017, at least 24 percent of
the single-family, owner-occupied mortgage loans
acquired by the government-sponsored enterprise
(GSE) must involve low-income families. At least 6 percent must be to very low-income families.
Borrowers need at least a 620 credit score to qualify
for the HomeReady program. Freddie Mac has a similar
program called Home Possible. If the Feds increase the
percentage of such loans the GSEs must purchase, be
concerned. Mortgages to folks with bad credit or high
debt should stay inside the Federal Housing Adminis-
tration (FHA) program. As long as the FHA mortgage
insurance premiums cover the inevitable losses, the
taxpayer is not picking up the bill.
One feature of many of the defaulted mortgages during the housing bubble was a lack of documented
income. Borrowers would state their income, but no
documentation was provided to back it up. Another
problem was the fact that lenders did not, in many
cases, track down borrowers’ tax returns even when
they had IRS Form 4506, which allows third parties to
receive tax returns.
Lenders did not want to know borrowers’ real income
because knowing so might have been a deal-killer. If
this happens again, beware. There are lenders who are
making nonqualified mortgage loans already, but this
is not happening to any significant extent — and non-QMs still have to meet the ability-to-repay provisions
instituted under Dodd-Frank.
Another troubling practice from the past crisis was
the way many appraisals were conducted. At that
time, many loan officers would find an appraiser who
would simply deliver the necessary value to make the
loan deal work. Much has been done to improve the
process and track appraisers since then. A key element
of those reforms is to ensure the loan officer is not
choosing the appraiser directly. The appraiser should
be chosen randomly from a list of approved appraisers
without any indication of estimated value in advance
of the appraisal, other than the sales agreement. This
ensures a more objective and accurate appraised
A more difficult issue to assess is the fact that
appraisers are disappearing. Appraisers have always
been underestimated. Now, every appraisal is scrutinized and scored. People have to put in many hours
before they can become licensed and certified
Housing crisis: Important
dates from the financial crisis
10 years ago
n Sept. 26, 2006: Home prices fell for first time
in 11 years.
n December 2007: U.S. enters a recession.
n Jan. 11, 2008: Bank of America buys Countrywide
n March 16, 2008: Federal Reserve guarantees
Bear Stearns’ assets.
n Sept. 15, 2008: Lehman Brothers files for
n Sept. 16, 2008: Federal Reserve bails out
n Sept. 25, 2008: Federal regulators shutter
Washington Mutual Bank.
n June 2009: Recession ends.
Sources: National Bureau of Economic Research and media reports
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