Friday, March 28, 2008

"Zippy" the mortgage loan

As reporter Jeff Manning described Thursday, a JPMorgan Chase employee distributed a memo called "Zippy Cheats & Tricks," which reads like a tipsheet for beating a video game. It advises employees at the banking company how they can help mortgage brokers jigger the in-house system, called "Zippy," that evaluates loan applications. Overstate the borrower's income, it suggests. Don't mention that some borrowers are relying on gifts to repay their loans. Inflate assets. "Never fear," the memo reads. "Zippy can be adjusted . . ."

There's plenty of blame to go around in this debacle. But it's not overstating things to say that a set of financial sophisticates figured out some ingenious ways to profit from the desires of would-be homebuyers. Along the way, the system of incentives and accountability that used to characterize mortgage lending was unmoored and sent floating away, never to be missed until it crashed into the dock at the U.S. Treasury.

The JPMorgan Chase memo emerged from an environment in which wealth was generated from the size -- not the substance -- of the transaction. If a bank could sell a $600 million bundle of mortgage-based securities, instead of just $400 million; if a homebuyer could be delivered into a $550,000 house, instead of just $255,000; if there was always a willing lender somewhere in the chain; why should anyone worry about the risks?

Continue on at the Oregonian

tip via Kevin Drum

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