Do you remember human underwriters?

I do, in 1987 I started as a loan originator in Indianapolis, and I chewed my nails every time I had to send in a file that wasn't perfect to an underwriter. My commission and my family's livlihood was on the line, and who knows what kind of day the underwriter was having.

Recent Mortgage Fraud Developments and Future Outlook
from Seattle's Rain City Real Estate Guide by Jillayne Schlicke
"Before we use to rely on automated underwriting systems and credit scores we had humans who would carefully underwrite mortgage loan files. During the caveman human underwriter days, loan originators and loan processors knew that underwriters could make or break a file. An underwriter had god-like power to grant or deny the American dream. They had minds like a detective and long-term memory capabilities of an autistic child who can recount the entire screenplay of The Incredible Journey along with all the background noises. Underwriters knew which loan originators had a history of submitting fake gift downpayment letters because they would all sit and chainsmoke together in an un-vented room for 9 hour straight comparing sob stories from loan originators whose files were denied. After work, they would saunter off to network with other underwriters from other banks at a local bar or Mortgage Banker’s Association meeting, same/same. Any fraud that a loan originator tried to pull off was easily sniffed out, with the LO retreating for a while and eventually leaving the company due to the ice cold group shun effect. There were no stated income loans. Two years of tax returns, a P&L and a balance sheet were brought in to underwriting and a few days later, an underwriter would hand the LO a sheet of paper telling the LO what number to use as income for qualifying purposes. If the newly self-employed could not qualify, that person found a co-signer, usually a parent."

The author of this post, from the perspective of human underwriters, goes on to suggest that loans underwritten properly would not have allowed nearly the level of fraud. This may be the case, but I'm not prepared to accept that the computers allowed the fraud. The fraud was conducted by real people.

Here's my perspective. First, sub-prime loans were priced too low Second, bond purchasers didn't do due diligence on the risk premiums in these loans, I bet they will now. Third, the housing bubble in vacation markets was not caused by sub-prime fraud, it was caused by people getting overly excited about making money ... not a crime.