The Subprime Crisis And The Expert Witness

The mortgage industry has many faces: the new buyer anticipating a home of her own, the investor hitting the ups and downs of the market, the realtor working to close one more deal, a builder wanting to maximize inventory, investment bankers developing new financial products, and more and more. All this based on credit standards that reached beyond credit guidelines proven safe over years of experience. In many ways the artificial exuberance of the dot com boom/bust is being replayed.

The scope of this crisis is so broad it has countries loosing substantial percentages of their reserves, world-class corporations taking multibillion dollar losses and homeowners losing their largest investment in record numbers not to mention a national recession. What has to happen for this to be fixed? The answer has more to do with public confidence and jobs than litigation but the Courts will play a role and that is the opportunity for the financial expert witness.

In the past six months I have assisted with several mortgage lawsuits, including subprime loans, borrower identity theft, and fraud on both the borrower’s and loan officers sides. There is no one person or thing to blame. The following are subprime related challenges that come up typically for the consulting expert.

Subprime lending, particularly Stated loans, where the lender accepts what the borrower claims as income, offers a variety of opportunities for borrowers and loan agents alike to obtain loan approvals that a more traditional underwriting would have denied. How and by whom the information or misinformation on the application was crafted is but one test for the expert. Others are: was the information reasonable, was there adequate supervision by the supervising loan broker, was the lender reviewing the loan package, was the reasonableness of the applicant’s information tested and numerous other issues in the underwriting, documentation, closing, servicing and securitization areas.

Identity theft is somehow makign it’s way into the issue as well. In a recent case a creative agent was processing two loans simultaneously for two different borrowers on two different properties. One of the applicants was in great credit shape and the other did not have a credit history. The first applicant had good income; the other hardly enough to make payments. The agent placed the applications with two separate lenders but using the name on the credit worthy borrower on both. I’ll omit all the details but both loans were approved, each lender seeing numerous requests for credit reports thought nothing of it since they were processing a loan from an outside loan agent. This was only discovered after the borrower with good credit wanted an equity loan and was turned down because she did not disclose all of her credit commitments.

Credit analysis with the FICO Score is another great opportunity for the expert. In a recent assignment an applicant took his lenders to court for reporting his series loans to the credit bureaus. The litigant claimed the lenders reported his equity line and credit card accounts incorrectly since the information reported made his credit score drop. An analysis of the six credit reports submitted as evidence showed the credit score did drop despite the borrower making every payment in a timely fashion. The reports also account balance limits often being violated, and when within the limits, over 50% of the account threshhold was being used. Both are major problems that can reduce credit scores.

Residential mortgage lending is document intense. Numerous disclosures, valuation documents and security forms can inform as well as confuse the borrower. Misunderstandings can occur and frequently litigation follows. The plaintiffs in a recent case swore they were to have a fixed rate loan despite signing documents titled ADJUSTABLE RATE MORTGAGE. They swore they did not agree to the payoff of their loan despite signing a two sentence letter agreeing to the payoff.

As this economic situation goes on, the need for experts who can explain the issues of financial regulation process will be needed.

The author is a legal Banking Consultant Expert Witness who has taken cases and provided expert witness testimony through the expert witness services company, Consolidated Consultants.  He has a background in banking, mortgage banking, credit quality, and commercial credit. For over twenty years he has served as an expert consultant and/or witness. Find him and many other technical expert witnesses listed with full C.V.’s. This is a free service.