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<DIV><STRONG><FONT size=5>Pressure at Mortgage Firm Led To Mass Approval of Bad
Loans<BR></FONT></STRONG>
<P><FONT size=-1>By David Cho<BR>Washington Post Staff Writer<BR>Monday, May 7,
2007; A01<BR></FONT></P>
<P></P>
<P>Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks
with a baseball bat as they walked through her office. <I>Bang! Bang!</I></P>
<P>" 'You cut my [expletive] deal!' " she recalls one man yelling at her. " 'You
can't do that.' " <I>Bang!</I> The bat whacked the top of her desk. As an
appraiser for a company called <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=NEW&nav=el"
target="">New Century Financial</A>, Hardiman was supposed to weed out bad
mortgage applications. Most of the mortgage applications Hardiman reviewed had
problems, she said.</P>
<P>But "you didn't want to turn away a loan because all hell would break loose,"
she recounted in interviews. When she did, her bosses often overruled her and
found another appraiser to sign off on it.</P>
<P>Hardiman's account is one of several from former employees of New Century
that shed fresh light on an unfolding disaster in the mortgage industry, one
that could cost as many as 2 million American families their homes and threatens
to spill over into the broader economy.</P>
<P>New Century has become the premier example of a group of companies that grew
rapidly during the housing boom, selling working-class Americans with
questionable credit huge numbers of "subprime" loans with "teaser" rates that
typically rose after the first two years. This business transformed the
once-tiny New Century into a lending powerhouse that was held up as a model of
the mortgage industry's success.</P>
<P>But now, with home values falling and adjustable loan rates rising, record
numbers of homeowners are failing to make their payments. And a detailed inquiry
into the situation at New Century and other subprime lenders suggests that in
the feeding frenzy for housing loans, basic quality controls were ignored in the
mortgage business, while the big Wall Street investment banks that backed these
firms looked the other way.</P>
<P>New Century, which filed for bankruptcy protection last month, has admitted
that it underreported the number of bad loans it made in its financial reports
for the first three quarters of 2006. Hardiman and other former employees of New
Century interviewed said there was intense pressure from bosses to approve
loans, even those with obviously inflated housing appraisals or exaggerated
homeowner incomes.</P>
<P>"The stress in that place was ungodly. It was like selling your soul," said
Hardiman, who worked for New Century in 2004 and 2005. "There was instant
notification to everyone as soon as you rejected a loan. And you dreaded doing
it because you paid for it. Two guys would come with a bat, and they were all
[ticked] off because you cut their deals."</P>
<P>New Century officials would not publicly respond to the ex-employees'
allegations. A senior executive, who spoke on condition of anonymity because of
state and federal investigations into the company, acknowledged that the
atmosphere in some branches might have been intense at times. But he said the
firm had safeguards to make sure workers did not feel pressure to approve
questionable loans.</P>
<P>Hearing what Hardiman went through, he said, was "upsetting" and "not
representative of our offices."</P>
<P>"In an organization with this size . . . I'm not naive to think that [such
behavior] didn't happen," the executive said. "But I find it highly implausible
over the last 10 years that something systemic was going on and somehow it was
disguised. . . . There were pressures, especially in a declining market, and
those pressures became more robust. But we turned up our controls and our
vigilance at the very same time."</P><B>As Industry Grew, Standards
Loosened</B><BR>
<P>Once a little-used lending tool, subprime loans made up 20 percent, or about
$600 billion, of all mortgages issued in the country last year. These loans
carry a high risk of default because they generally are made to home buyers with
questionable credit. But because they require borrowers to pay high interest
rates, they have been a gold mine for lenders in recent years, accounting for 30
percent of all profits made in the mortgage business, according to Mercer Oliver
Wyman, a consulting firm.</P>
<P>Lenders also made a fortune selling subprime loans to Wall Street. Investment
banks charged huge fees for packaging them into massive bonds called
mortgage-backed securities. Investors received high returns for buying and
selling these bonds.</P>
<P>But there is growing evidence that along this chain, the filters that were
supposed to catch bad loans did not work.</P>
<P>Salespeople were supposed to be the "first line of defense" against fraud and
bad loans, said Steve Krystofiak, president of the Mortgage Broker Association
for Responsible Lending, a group that is trying to retool practices in the
industry.</P>
<P>But salespeople worked on commission -- meaning the more loans they sold, the
more bonus money they received. "That's a bad business model. It's absolutely
contradictory," Krystofiak said, adding that he has witnessed salespeople tweak
numbers in mortgage applications to ensure that the loans would be approved.</P>
<P>Automated underwriting software that searches for irregularities and possible
fraud was also supposed to stop bad loans. But industry professionals say such
programs were easily manipulated. Meanwhile, some appraisers and underwriters,
who examine housing values and other claims made on loan applications, say they
felt pressure from bosses to let questionable loans through.</P>
<P>New Century and other lenders sold their mortgages through auctions to
investment banks. Once a bid was accepted, the investment banks performed their
own detailed review and could return any loans deemed questionable without
paying for them.</P>
<P>Several investment banks, including <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=MER&nav=el"
target="">Merrill Lynch</A>, Morgan Stanley and <A
href="http://financial.washingtonpost.com/custom/wpost/html-qcn.asp?dispnav=business&mwpage=qcn&symb=GS&nav=el"
target="">Goldman Sachs</A> said they rigorously examined the subprime mortgages
they had bid on. Morgan Stanley, for instance, said it reviewed every loan
appraisal and the credit histories of about 25 percent of borrowers.</P>
<P>Traders familiar with the bidding process said competition for mortgages from
New Century began to heat up in 2005. Mortgage-backed securities based on New
Century loans had been performing better for investors than those from other
subprime lenders, in some cases producing two or three times the return of a
U.S. Treasury bond. Many banks felt they had to loosen their standards and agree
to return fewer bad loans in order to win the auctions, the traders said.</P>
<P>The head of a large Wall Street bank's mortgage group contended that his firm
regularly lost out on New Century's business because its due diligence process
was stringent and it had been returning a high number of loans. New Century
wanted the bank to ease its standards, and the issue became a source of friction
between the companies.</P>
<P>"The entire industry, over time, became more lax," he said, speaking on
condition of anonymity because he was not authorized to talk about his company's
inner workings. "The more [loans] you accepted, the better relationship and the
better price you would have. The name of the game was definitely volume."</P>
<P>A New Century spokeswoman said negotiating with banks to reduce both their
due diligence and the number of loans they returned was a "generally accepted
practice" that was "always a matter of discussion."</P>
<P>There was little downside for banks to push paper through the pipeline, said
Kevin Beyers, a forensic accountant at Parkside Associates in Atlanta who
specializes in the mortgage industry. Besides returning loans, these firms could
require a lender to buy back loans that had cleared the banks' reviews but later
turned out to be bad.</P>
<P>"Loose underwriting was not a secret," Beyers said. "[Investment] banks had
to have known what was going on. They just have too much information and
sophistication at their fingertips. And they knew the lenders pretty
well."</P><B>Firm Unravels With Market's Slump</B><BR>
<P>To address the problem of bad loans, New Century said since 2000 it has been
reducing the compensation of branch managers if they approved loans that were
later determined to bad. Underwriters have always been paid on the quality of
their work rather than the volume of loans approved. New Century said it always
had monitored the performance of employees and last year implemented a
statistical program that tracked whether they were approving a high number of
bad loans.</P>
<P>A spokeswoman said these moves helped the firm reject or reduce the appraisal
value of 20 percent of the loan applications it received in the Northeast last
year.</P>
<P>The firm's comments are difficult to square with accounts from rank-and-file
workers. These employees worked at five different branches that handled subprime
loans all over the country. All except Hardiman spoke on condition of anonymity,
citing recent e-mails from the firm telling them not to comment publicly,
although the company said that is standard corporate media policy. Hardiman said
she was fired for refusing to approve weak loans. Others said they left because
they were pressured to pump loans through the system. A few were interviewed
while they were worked at New Century but then lost their jobs after the firm
filed for bankruptcy.</P>
<P>Although there were variations in their descriptions of the atmosphere in
their offices, most said they were pushed to approve questionable loans. Several
of the interviewed employees said they faced "unofficial quotas" of loans that
had to be approved each day. The pressure to meet these expectations was so
unrelenting that a worker in Foxboro, Mass., collapsed from stress and was taken
to the hospital, two employees said. In the firm's Long Island branch, the
atmosphere resembled a fraternity, largely because the average age was 23, an
appraiser there said.</P>
<P>A veteran appraiser who worked in Pearl River, N.Y., said he joined New
Century because he had heard the pay was good. That turned out to be true, but
he quickly discovered that the place was a pressure cooker. He said he often was
encouraged "to make loans work." His boss generally supported him when he wanted
to reject a questionable loan, he said. But other office managers "were all
about the numbers just so they got their bonuses."</P>
<P>Still, the veteran appraiser didn't blame them.</P>
<P>"They were pressured to make loans, that's how you do business," said the
man. "They were trying to do more and more business. That's essentially what
Wall Street wanted."</P>
<P>For years, the volume strategy worked.</P>
<P>Shares in the Irvine, Calif., company rose from $5 in early 2001 to $66 at
the end of 2004, cementing its status as a Wall Street favorite. Last year it
issued $51.6 billion in loans, more than any other specialized subprime mortgage
lender.</P>
<P>When times were good, the company showered lavish gifts on its salespeople,
treating them to vacations in Europe and Caribbean cruises hosted by sports
celebrities. As recently as March, a few weeks before it filed for bankruptcy,
the company had a trip to Ireland scheduled, employees said.</P>
<P>The boom continued for New Century until 2006, when mortgage payment default
rates spiked. That happened because homeowners who bought houses last year
generally saw their values drop. And, in a declining housing market, many
homeowners, especially those who are poor, choose to let their mortgages fall
into delinquency rather than try to keep up with the payments, analysts
said.</P>
<P>At first, it appeared the cumulative effect of these defaults would have only
a moderate effect on New Century's earnings. Then, in February, the company said
it would need to revise its financial results for the first three quarters of
2006. A few weeks later, it acknowledged that federal investigators had launched
probes into the timing of the stock sales of some of its executives. The company
declined to comment on the investigations.</P>
<P>The announcements rattled the markets because the firm was so well regarded.
The stock price plummeted 90 percent, and the firm was delisted from the New
York Stock Exchange. (Shares now trade under a dollar on an obscure exchange.)
New Century filed for bankruptcy April 2 but said current customers would be
unaffected and could continue making their mortgage payments.</P>
<P>The appraiser in the Pearl River branch said he considered himself a loyal
employee and planned to stick by the company through its struggles. But he was
fired the day after the bankruptcy filing, along with 3,200 employees, or half
the firm's workforce. Most of those interviewed said they were offered two weeks
of pay at rates lower than their salary. A few said they did not receive any
severance.</P>
<P>New Century announced Thursday that it is laying off 2,000 more associates.
The firm is left with about 750 employees, a company spokeswoman said.</P>
<P>Hardiman, the former New Century appraiser, said she was not surprised by the
company's downfall. Few at the company seemed to be thinking long-term when she
was there. The message she heard constantly from headquarters, which was
broadcast at work conferences and in e-mails, was to approve more loans.</P>
<P>"We were constantly told, 'If you look the other way and let an additional
three to four loans in a day that would mean millions more in revenue for New
Century over the course of the week,' " Hardiman said. She added that it seemed
"no one, from the top levels down to the lower levels of the office, didn't want
those loans to go through."</P></DIV></BODY></HTML>