In my loan underwriting days, I worked very briefly at Central Federal (North Hollywood/Toluca Lake branch).  Mortgage brokers packaged loans (prepared the paperwork) and the loans were submitted to the branch (me) for approval (or declination).  

A couple of memorable loan instances come to mind:

1) Once, I was reviewing a package for a young woman supposedly making a “big salary” – yet she had very little in savings.  I flipped the pages to the credit report and her credit cards consisted of Sears, Penny’s, etc.  Hmmm, no savings, no apparent clothes addiction – “where is that big salary going?” As a spot check when something about the paperwork “looked funny,” I would sometimes call the appraiser, or credit reporting agency to verify that the report was actually prepared by the company in question.   In this instance I contacted the credit agency that supposedly prepared the report and they informed me that they had a break-in and that blank reports were stolen (this was during the 80’s before it was so simple to recreate documents on a computer).  The more I dug through this file, the more fraud I discovered.  I brought the loan to my boss who told me to call the mortgage broker to pick up the file.  “That’s it,” I asked?  “Yes” she told me; I persisted, “but aren’t you at least going to tell them to take their business elsewhere?” “No.”  So the broker picked up the file, submitted it to another lender and that was it. 

2) When we “underwrote” we had guidelines.  The “back end” ratio (total debt to income) was not too exceed 38% of the gross monthly income.  BUT if someone were applying for an equity loan (pulling equity/money) out of their home, the ratio could be higher – up to 42%.  I tried questioning the “logic” of this, “Why if someone is putting money (down payment) into a home the qualifying is more difficult than someone taking money out?” The “brilliant” answer, “Well, everyone knows that if they are getting a second their debt ratio will be higher” Oh, and yes, I quit very soon and this bank was one of many that were declared insolvent and taken over.

3) I also had a brief stint at Deseret Pacific Mortgage.  They too went out of business…. The loan that did it for me was:  A Rabbi and his wife… I think their down payment was 60%; the requested loan amount was less than the land value– so even if the house burnt down and there was no insurance the lender still had the land as collateral– they couldn’t lose.  The debt ratio was 48%, the Rabbi had impeccable credit, the bank had the collateral but we couldn’t make the loan because the debt ratio was too high.  My question was why would someone put 60% down to go into foreclosure???? 

After over a decade in mortgage banking and over a decade in real estate, I see the banks loosen up the underwriting criteria and get crazy and then tighten up and get stupid.  It seems to be a cycle.