A newly surfaced memo from banking giant JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis.
The memo's title says it all: "Zippy Cheats & Tricks."
It is a primer on how to get risky mortgage loans approved by Zippy, Chase's in-house automated loan underwriting system. The secret to approval? Inflate the borrowers' income or otherwise falsify their loan application.
The document, a copy of which was obtained by The Oregonian, bears a Chase corporate logo. But it's unclear how widely it was circulated or used within Chase.
Bank spokesman Tom Kelly confirmed that the "Cheats & Tricks" memo was e-mailed from Chase but added that it does not reflect Chase corporate policy.
"This is not how we do things," he said. "We continue to investigate" the memo, Kelly said. "That kind of document would neither be condoned or tolerated."
The March e-mail was sent by Tammy Lish, a former Chase account representative in Portland. Chase fired her days after discovering she had sent it.
"I did not write it," Lish said. "It was sent to me by another (Chase) rep in another office along with some other documents that were more step-by-step customer training documents."
Even if the memo was penned by a single employee, it illustrates an attitude prevalent in certain corners of the mortgage industry during the boom years. In the face of sustained and significant home price increases, much of the industry veered away from traditional notions of safe and sound lending. Loan volume became as important as loan quality, particularly for the rank and file typically paid on commission.
During the boom, it was common for lenders and brokers to get paid more for risky subprime loans than for 30-year fixed-rate loans because the higher-interest loans fetched a higher price on Wall Street.
Chase, the nation's second-largest bank, originates mortgage loans itself but also operates a wholesale arm that underwrites and funds loans brought to them by a network of mortgage brokers. The "Cheats & Tricks" memo was instructing those brokers how to get difficult loans approved by Zippy.
"Never fear," the memo states. "Zippy can be adjusted (just ever so slightly.)"
The Chase memo deals specifically with so-called stated-income asset loans, one of the most dangerous of the mortgage industry's innovations of recent years. Known as "liar loans" in some circles because lenders made little effort to verify information in the borrowers' loan application, they have defaulted in large number since the housing bust began in 2007.
Chase no longer makes any stated-income loans, part of the bank's efforts to tighten its loan underwriting, Kelly said. It wrote down $1.3 billion in nonperforming mortgages at the end of 2007.
Lish said she sent out the document inadvertently. "The document was irrelevant by the time I sent it out because the company had ceased offering stated-income loans."
The document recommends three "handy steps" to loan approval:
Do not break out a borrower's compensation by income, commissions, bonus and tips, as is typically done in a loan application. Instead, lump all compensation as the applicant's base income.
If your borrower is getting some or all of a down payment from someone else, don't disclose anything about it. "Remove any mention of gift funds," the document states, even though most mortgage applications specifically require borrowers to disclose such gifts.
If all else fails, the document states, simply inflate the applicant's income. "Inch it up $500 to see if you can get the findings you want," the document says. "Do the same for assets."
Chase's Kelly said the bank has never encouraged any of the suggestions in the memo.
"If somebody is putting inaccurate information in their loan application, they're lying and committing fraud," he said.
Still, some local mortgage brokers view the memo as vindication. Brokers have argued they've been unfairly blamed for the lax lending standards that led to a wave of defaults. The large national lenders drove the weakening standards, they argue.
The Chase memo is "a perfect example of one of the big five banks out and out telling mortgage brokers to commit fraud," said Todd Williams, a broker with Evergreen Ohana Group in Portland. "And this has been going on for years."
Williams and other mortgage brokers gave a copy of the memo to Oregon financial regulators.
"It boggles my mind that any federally chartered organization would invite this kind of activity in such a flagrant way," said David Tatman, head of Oregon's Division of Finance and Corporate Securities.
But Tatman confirmed that as a state regulator, he doesn't have jurisdiction over the federally chartered Chase.
The U.S. Office of the Comptroller of the Currency has authority over Chase. OCC spokesman Dean DeBuck declined to comment on the document.