HousingWire associate publisher and former subprime lender Richard Bitner testified to the Congressional Financial Crisis Inquiry Commission on the reasons behind the subprime mortgage collapse on Wednesday in an effort to explain just who was responsible for the collapse that eventually led to a world wide economic crisis.
While much of the blame has been placed on borrowers for taking out loans they could not afford or the loan officers that gave them their loans, Bitner made it very clear to the congressional committee that the banks were ultimately to blame for the crisis. His reasoning behind this was that although borrowers took out loans that were not sustainable, the lack of responsible underwriting from the banks allowed these borrowers to be approved for these loans. Additionally, Bitner counts the securitization of mortgages as a major contributor to the increased popularity of the subprime market, which eventually led to its downfall.
Bitner says that with the introduction of mortgage-backed securities, banks were no longer directly responsible for the loans they serviced. In the past, banks directly provided the funds they were lending, and thus had a more vested interest in the loan’s success and assessed the risk of the loan carefully. With the introduction of the securities, the banks became the middle men in the process, only providing the underwriting and maintenance of the loan while private investors and firms provided the capital.
With the influx of new capital from investors, banks took more risks with their mortgage programs. The results of this diffusion of interests were that banks were less willing to restructure loans that became unsustainable and that each individual player in the mortgage process could point the finger at someone else when a loan went bad. Bitner claims that while the introduction of mortgage backed securities added an unprecedented amount of capital for subprime mortgages, it also led to irresponsible underwriting practices and the eventual collapse of the market.
Many people have blamed loan officers and borrowers for the irresponsible loans they took out as a reason for the collapse of the housing market. In his statement, Bitner acknowledges that the popularity of subprime mortgages, competition for these loans, and potential for large commissions led many loan officers to fudge the numbers of their borrower’s income or debt to income ratios. Bitner also says that the rules regulating these practices were few in most states, and that little could be done to reign in these loan officers.
Of course, the check on all of this is supposed to be the underwriting department of the loan servicer. As stated before, the sheer volume of money available to these banks and the competition between them for loans led them to promote ever more risky loan packages. Bitner lists multiple programs such as Countrywide’s 100% income stated loan as a prime example of the risks banks were willing to take on their loans. While stated income loans were by no means exclusive to Countrywide, the low credit requirements (620 for self employed borrowers, 640 for wage earners) for Countrywide’s specific program was unheard of. Added to the problem of lower qualifying credit scores were the emergence of loans which required no down payments and lax proof of income and rental history requirements. As Bitner puts it, “When borrowers with bad credit, no money, no verifiable income, and no history of paying rent were approved for mortgages, there should be no surprise that loans defaulted.”
For a full transcript of Richard Bitner’s statement to the Congressional committee, visit this link.