A Mortgage Underwriter's View of the Sub-Prime Crisis: Is Greed the Cause of the Current Mortgage Situation?

For the past 15 years, I have worked in the mortgage industry. I've been through many layoffs, mergers and unpredictable interest rates. But I have never experienced anything like the last two years. There's plenty of blame to go around for what has happened. As an underwriter, the one who decides if your loan is approved or denied, this is my opinion on why the sub-prime crisis is occurring.

Years ago, when I started working in the mortgage industry, there were few products and many guidelines. Basically we had fixed rate and adjustable products. The decision whether to make the loan was not automated. It was decided by a highly skilled and thoroughly trained underwriter. In many companies these employees were placed in secured locations so no one could disturb them as they made their critical decisions. For example, where I worked at First Union, you had to go through a secured lock to reach the underwriting department. Managers only had access to this area.

The guidelines during this time were tight. Most products required your housing ratio not to exceed 28%. This meant that your total housing payment could not exceed 28% of your total income. You were allowed 8% of your income for other payments such as automobile, credit cards, and child support, or a total back end ratio of 36%. This left 64% of your income for groceries, gas, insurance, clothes, education, entertainment, emergencies, etc. In most situations this was sufficient.
Several things changed and along with this underwriters were forced to change how we reviewed mortgage applications. Fannie Mae and Freddie Mac both developed automated underwriting systems. Since many mortgages were sold to them, they had their own guidelines, based on the performance of the loans they purchased. Underwriters were responsible for validating the integrity of the information that was entered, but they now shared the decision to approve or deny with the system. There were many times that I felt a loan should be denied but because the system had spit out an approval, I was forced to do the same.