By Robert Stowe England
December 16, 2011
According to a former mortgage broker, members of Congress, Fannie Mae, Freddie Mac, and federal officials orchestrated and imposed on mortgage brokers and credit rating bureaus a policy to rapidly rescore consumer credit ratings so that more borrowers without reported incomes could get mortgages.
This coordinated effort enabled many subprime and nearly subprime borrowers to temporarily appear to be have credit scores high enough to be prime borrowers and, in the process, greatly expand lending in a period that stretched from 1998 to 2004.
“I'll bet 95% of the mortgages that went out of our office were subprime even if they weren't rated that way,” the broker said.
Mortgage brokers are wholesale lenders who originate their mortgages for large banks and other financial institutions.
“What infuriates me about when [President] Obama speaks or Barney Frank or anyone else who talks about these mortgage-backed securities and everything that happened, is that nobody knows the real truth about what goes on in the mortgage business and why it failed,” the broker said.
The broker’s claims, if substantiated, could mean that the true level of subprime and risky lending at Fannie and Freddie ahead of the 2008 financial crisis, was dramatically higher than the already high $1.8 trillion previously estimated to be on their books in mid-2008 by Ed Pinto, former chief credit officer for Fannie Mae.
Rapid credit rescoring was designed to get low credit scores up to the 700 credit score level where borrowers could qualify for existing programs at Fannie and Freddie that did not require any reported or stated income.
The broker, who described how the scheme worked in a call in to the Rush Limbaugh Show on December 7, identified herself only as “Laurie,” who said she had worked both as a packager of loans and an advertising executive for a mortgage brokerage firm.
Laurie said she did not want to identify herself because the broker had become involved with lawsuits over some of these practices.
The script of the conversation between Laurie and Limbaugh can be found at this link:
The pressure on mortgage brokers to engage in rapid credit rescoring came from the credit rating agencies, according to the broker. “We used to get visits by our credit representatives from the three major credit bureaus,” she said. “They were under a lot of pressure to develop a program to allow people to, quote, unquote, fix their credits faster,” she explained.
It was clear where the pressure on the bureaus originated. “According to the people from the credit managers bureaus, they were getting that pressure from Congress and [Federal Housing Administration or] FHA and Fannie and Freddie that they weren't doing enough to help people,” Laurie recalled.
Washington politicians and bureaucrats, in speaking to credit rating bureaus, belittled and ridiculed their rating practices. The credit bureaus were accused of “being unfair because they weren't doing enough to allow people who had had financial problems to fix their credit.”
The higher scores obtained through the rapid rescoring process usually proved to be fleeting.
The new higher credit score “wouldn't survive the next update from the credit bureau,” said Laurie. “The next time that update [from the credit bureau] came along, everything [that was detrimental to the borrower] was back on [the credit report], everything was like it was before,” she added.
Rapid credit rescoring was only available from mortgage brokers, Laurie said, and not for other consumer loans. In fact, sometimes people who knew about the availability of the rapid credit rescore would abuse that arrangement by going to a friendly mortgage broker to get a temporarily higher score to get a car loan, Laurie said.
The practice of rapid credit rescoring, in turn, made it possible for Fannie and Freddie to dramatically ramp up the volume of mortgage originations in the period from 1998 to 2004.
“When Fannie began this idea of packaging these things as securities and grouping them together, you'll find that the number of mortgage brokers for residential mortgages in the country skyrocketed,” Laurie said.
With Fannie and Freddie onboard the rapid credit rescoring process, new firms could quickly obtain lines of warehouse credit from banks to jump into the business of being mortgage originators.
The practice of rapid credit rescoring started out as a fairly benign. “It went from, yeah, maybe it took a long time to fix your credit to what we call the rapid rescore process,” Laurie said on the radio talk show.
Gradually, the practice turned toxic and fraudulent. “Our office could literally, in one day, take everybody's bad credit issues, write a one-line sentence about each one, fax it over to the credit bureau that . . . we paid to be members of, and, boom, within an hour, they were dropped off and the credit was rescored,” Laurie said on air.
The whole process became a sham. “It took literally less than 15 minutes at the end of the day,” said Laurie. “I mean we could fax it over and have it faxed back and rapid rescored.”
The growing band of mortgage brokers that joined the wholesale mortgage lending business would attend Fannie and Freddie seminars once or twice a year, according to Laurie.
“Fannie and Freddie were there, and they might as well have set up a carnival booth,” Laurie said. “I mean they were so excited about the fact that if you were a new mortgage business and you could get a wholesale line of credit, you could rapid rescore and qualify 500,000 people in a year, and they would back and buy everything you could send them.”
With the advent of rapid credit rescoring, the number of brokers employed by the business where Laurie was employed, was expanded from two to 20 brokers and the owner “sat in an office and did nothing but pull in wholesale lines of credit,” from such institutions as Washington Mutual, Laurie explained.