Subprime lending execs back in business five years after crash

After the Meltdown: Part two in our series looking at the impact of the financial crisis of 2008

 

Editor's note: Nearly five years ago, on Sept. 15, Lehman Brothers Holdings Inc. filed for Chapter 11, the largest bankruptcy in the nation’s history. The move set off a series of dramatic actions in Washington, D.C., and on Wall Street as bankers and regulators sought to avoid a shutdown of the global economy. To mark the anniversary, the Center for Public Integrity is publishing a three-part series on what has happened since the meltdown.
Andy Pollock rode the last subprime mortgage wave to the top then got out as the industry collapsed and took the U.S. economy with it. Today, he’s back in business.
Pollock was president and CEO of First Franklin, a subprime lender whose risky loans to vulnerable consumers hastened the downfall of Merrill Lynch after the Wall Street investment bank bought it in 2006 for $1.3 billion. He was still running First Franklin for Merrill in 2007 when he told Congress that the company had “a proven history as a responsible lender” employing “underwriting standards that assure the quality of the loans we originate.”
The next year, federal banking regulators said First Franklin was among the lenders with the highest foreclosure rates on subprime loans in hard-hit cities. Standard & Poor’s ranked some of its loans from 2006 and 2007 among the worst in the country. Lawsuits filed by AIG and others who bought the loans quoted former First Franklin underwriters saying that the company was “fudging the numbers” and calling its loan review practices “basically criminal,” with bonuses for people who closed loans that violated its already-loose lending standards.
Merrill closed First Franklin in 2008 after the subprime market imploded and demand for risky loans dried up. For Pollock and his contemporaries, who have survived decades of boom and bust in the mortgage trade, the recent near-toppling of the global economy was a cyclical, temporary downturn in a business that finally is beginning to rebound.
Five years after the financial crisis crested with the bankruptcy of Lehman Brothers Holdings Inc., top executives from the biggest subprime lenders are back in the game. Many are developing new loans that target borrowers with low credit scores and small down payments, pushing the limits of tighter lending standards that have prevailed since the crisis.
Some experts fear they won’t know where to stop.
The Center for Public Integrity in 2009 identified the top 25 lenders by subprime loan production from 2005 through 2007. Today, senior executives from all 25 of those companies or companies that they swallowed up before the crash are back in the mortgage business. Most of these newer “non-bank” lenders are making or collecting on loans that may be too risky to qualify for backing by the U.S. government. As the industry regains its footing, these specialty lenders represent a small but growing portion of the market.
The role of big subprime lenders in teeing up the financial crisis is well documented.
Lawsuits by federal regulators and shareholders have surfaced tales of predatory lending, abusive collection practices and document fraud. A commission charged by Congress to look at the roots of the crisis said lenders “made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities.”
Risky loans, a Senate investigation concluded, “were the fuel that ignited the financial crisis.”

As borrowers defaulted at increasing rates in 2006 and 2007, global financial markets tightened, then froze. The result was the worst economic crash since the Great Depression. Today, millions of Americans still face foreclosure. Yet few subprime executives have faced meaningful consequences.
“Old habits die hard, especially when there’s no incentive to do things differently,” says Rachel Steinmetz, a senior underwriter-turned-whistleblower who worked at subprime lender GreenPoint Mortgage, later bought by Capital One, until June 2006. “The same shenanigans are going on again because the same people are controlling the industry.”
 To be sure, loans offered by their new companies face unprecedented scrutiny by regulators and investors. Many of the riskiest practices from the subprime era have been outlawed.
“We could never, ever go back to the kinds of products we were selling. They were disastrous,” says John Robbins, who founded three mortgage lenders — two before the crisis, and one in 2011, from which he recently stepped down. The new Holy Grail for some lenders, according to Robbins: a mortgage that complies with new rules yet “creates some opportunity to lower the bar a little bit and allow consumers the opportunity to buy homes [who] really deserve them.”
Robbins is one of several executives identified in the Center’s investigation who have gathered up their old teams and gotten back into the mortgage business. Others have tapped the same private investors who backed out-of-control lending in the previous decade.
The lenders vary in how willing they are to accept lower down payments, weaker credit scores or other factors that can make a loan more risky.
New Penn Financial allows interest-only payments on some loans and lets some borrowers take on payments totaling up to 58 percent of their pre-tax income. (The maximum for prime loans is 43 percent.) PennyMac's non-government loans make up a tiny portion of its total lending and have virtually the same underwriting standards as prime mortgages, but are bigger than government agencies would allow. And