“…for example, if someone took out a (FHA) loan 10 years ago, and maybe they got a $5,000 gift from their parents, well, technically, you’re supposed to get a gift letter from the parents. Well, let’s say we didn’t get the gift letter. The loan has been handled perfectly well for 10 years…

…If the person loses their job, and now they’re in default, well the fact that we didn’t get a gift letter from the $5,000 gift from their parents 10 years ago has nothing to do with them losing their job and not being able to make their loan payment.”, Kelly King, Chairman and CEO, BB&T

“First, let’s get something straight, EVERYONE involved knew each mortgage loan’s key parameters: 1) prime/Alt-a/subprime, 2) income documented/income not documented, 3) FICO score, 4) Loan-to-value ratio, etc. All these parameters were clearly and unambiguously disclosed (and electronic tapes were provided) on every single mortgage loan to everyone involved in every sale of mortgage loans or private MBS securities. So every investor, insurer, and guarantor, knowingly purchased these types of loans and the key risks inherent in them. Now within those parameters, an underwriter would audit the file to determine that the guidelines were in fact met. Here is a simple example: a particular loan program with a maximum 80% LTV up to a $500,000 loan amount, might require that the borrower have a minimum FICO score of 700. At this point, I would point out that there is no standard legal or industry definition of what constitutes an underwriting error or mortgage fraud. In my opinion, the only error that is important is one that would cause a loss to occur on a loan, but like the BB&T example above, my experience is most are minor, technical errors. In my simple loan program example above, if the underwriter had made an error and the loan was actually an 81% LTV loan and/or the FICO score was 699, would that have made any important difference? Clearly not. Like any large human endeavor (say filing tax returns, social security, etc.), there are going to be errors made and some fraud that needs to be rooted out and prevented. My experience is that with almost any mortgage loan, if you spent enough time auditing it, you could usually find something that was technically wrong; a minor error. The U.S. housing bubble bursting caused a tremendous amount of mortgage defaults. While I wasn’t around in the aftermath, my long experience tells me that like during any period of significant growth (mortgage volumes pre-crisis), there probably was a somewhat higher percentage of errors and fraud, but not high enough to matter in a material way to the performance of an individual security and certainly not high enough to cause a financial crisis. I believe the underwriting error and mortgage fraud claims have largely been a “perfect-storm” red-herring: 1) a way for government-backed Fannie, Freddie, and FHA (who performed due diligence samples near the time they bought loans) to erroneously claim they were duped and that they were not responsible for their own guarantee/investment decisions (and to push their own losses back on lenders and others, to help recapitalize themselves), 2) a way for private institutional investors who knowingly bought or insured riskier subprime and nonconforming MBS to erroneously claim they were duped  and to avoid blame for losses from their own investment decisions (and again, to mitigate their losses by pushing them back on the lenders, securities underwriters, and others), and 3) a way for the government to blame the bankers for the financial crisis and recoup money from the banks by erroneously claiming disclosure securities fraud. Don’t believe me? Have you seen even one statistically-valid audit performed that proves mortgage underwriting errors (and mortgage fraud) caused a material loss in even one mortgage-backed security, let alone caused the entire financial crisis? I haven’t and don’t think it can be done, because I don’t think it’s true. (It is possible that some securities from some issuers might have enough material underwriting errors/fraud to create material losses for investors, but I am not aware of a single one being proved and I don’t believe it was in any pervasive manner as has been alleged.)  The fact of the matter is that most of a these losses were caused by an unprecedented downtown in housing prices; a huge asset bubble bursting.”, Mike Perry, former Chairman and CEO, IndyMac Bank


BB&T CEO: Underwriting standards not issue

Monday, 21 Jul 2014 | 1:23 PM PT

Kelly King, BB&T Corporation Chairman & CEO, explains the Department of Housing and Urban Development request for an audit survey. “We’ve not been fined or found guilty of anything, and we’re not sure we’ll have an audit,” he says.

Video available at CNBC: http://video.cnbc.com/gallery/?video=3000292564

Kelly King:

We did late in the 2nd quarter receive an…ah…request for an audit survey which is a way for them to just do a very quick cursory look at your portfolio.  It may or may not lead to an actual audit, and the audit may not result in any actual charges, so we are very early in this process, so it’ll probably take a year and a half or more to conclude.  Ah, but we did it would be prudent and conservative that we should take a reserve, which is what we did today.  So we’ve not been fined, we’ve not been found guilty of anything, we don’t even know (sic) sure if we’ll have an audit, but this has been going on, Kelly, for the last couple of years through the industry.  Started at the top, there was a second tier, now they’re getting to the third tier, and it just, kinda out of turn.

So, ah, what’s really going on here is that the HUD supervising the FHA program, in my judgment, is really looking back at an industry will accept a standard of underwriting these loans, which as you know is primarily how first time buyers get into houses, with a different set of lenses.  It is a different set of lenses.  I mean, you know, we did what everybody did, it was very acceptable, everybody was audited, and it was a very acceptable…and some people won’t be confused about what really happened.  This is not egregious bad underwriting.

So, for example, if someone took out  a loan 10 years ago, and maybe they got a $5,000 gift from their parents, well, technically, you’re supposed to get a gift letter from the parents.  Well, let’s say we didn’t get the gift letter.  The loan has been handled perfectly well for 10 years.  If the person loses their job, and now they’re in default, well the fact that we didn’t get a gift letter from the $5,000 gift from their parents eight years ago has nothing to to with them losing their job and not being able to make their loan payment.


Kelly, are you saying that you’re confident that your underwriting standards are not the issue here?

Kelly King:

Yes, I do not think our underwriting standards are at issue.  It think the issue is that we are looking back at an industry practice through different lenses, and we’ve raised the bar, we’ve raised the standard.  You know under that standard, you know, if you now apply it, you know, you could say it was technically wrong, but what we were doing was what everyone was doing.  You know, it’s hard to know if they’ll ever find anything about Longfronds (sp?).  You know, it’s up to them…


Posted on July 23, 2014, in Postings. Bookmark the permalink. Leave a comment.

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