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Special section Subprime mortgage industry meltdown

The industry has itself to blame for much of the mortgage meltdown. No one could think of a reason to say "no" to iffy borrowers.

Lender implosion

Drive to make deals fuels mortgage woes

The nonprime mortgage business is in a mess because during the boom years, hardly anyone had an incentive to say no.

The people who take applications, the companies that lend the money, the appraisers who check property values, the investment banks that sell mortgages to investors and the investors themselves -- all had millions of reasons to keep mortgages flowing to borrowers who couldn't afford them. Each reason had a dollar sign attached to it. As long as each participant kept saying yes to risky borrowers, everyone made money.

"It's like we were originating willy-nilly, with abandon, and the consequences be damned," says Christopher Cruise, who trains brokers and loan officers. "As Americans, we're accustomed to not being told no. ... If we want to have a mortgage loan and we want it now, we don't want to hear about the potential consequences down the road."

That goes for borrowers and also for the players throughout the mortgage industry. The siren song of bountiful paychecks drowned out the murmurings of conscience.

"Are there individuals and folks in the supply chain here and there that don't care, or don't necessarily have the borrower's best interest at heart?" asks Jim Svinth, chief economist for "Yes. But that can be said about just about any industry where people are paid on commission."

Make the deal, dump the risk
Much ink has been spilled on the meltdown going on in subprime mortgages, which are home loans for people with flawed credit histories. Analysts believe problems will show up in Alt-A mortgages, which go to borrowers who have so-so or even good credit, but who don't document their income or assets. A lot of interest-only loans can be lumped into the Alt-A category, too. Together, subprime and Alt-A are known as nonprime.

The mortgage industry is set up in such a way that the participants chase after profits while dumping the risks onto someone else. The chain of buck-grabbing and buck-passing starts with mortgage brokers and loan officers -- the men and women who work face-to-face with borrowers.

Brokers and loan officers make their livings by persuading people to get mortgages. There's no profit in telling an applicant that he has no business buying a house. Except in cases of flagrant fraud, brokers and loan officers don't suffer consequences if their customers later fall behind on their house payments.

'We don't really care'
"For us, as frontline originators, there isn't a direct correlation between loan performance and compensation, so we're disconnected from these failures so long as there's no fraud. In a way, we really don't care that much," Cruise says.

-- Posted: April 18, 2007
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