Bankers Believe Lax Underwriting Root of Credit Crisis

January 9, 2009 No Comments »


While many of us are still coming to terms with the ongoing mortgage crisis, others are looking for answers as to how things got so bad, so quickly.

And while it’s hard to nail down one single cause (we can’t blame the home builders), a new banker survey pins much of the blame on lax underwriting.

The results of Grant Thornton LLP’s 16th Bank Executive Survey, conducted with Bank Director magazine, found that 54 percent of bankers felt poor underwriting was the leading culprit.

That was followed closely by the political push to increase homeownership and a lack of oversight in the mortgage industry.

While I do agree these issues certainly played their part, the originate-to-distribute model still seems to be the underlying problem.

In recent years, the originate-and-hold mentality quickly shifted to the originate-to-distribute model, which rapidly led to poor underwriting and lax oversight.

Banks and mortgage lenders no longer cared much about the quality of mortgages they wrote, as they were quickly sliced up and sold to third-party investors.

The promise of home price appreciation kept the system running smoothly, allowing underwriters to make bad decisions, as pressured by their superiors who received big incentives to ensure the party rolled on.

Take a look at the theory in action, as explained by Celent, a research and consulting firm.

Back to that survey for a moment; 18 percent of respondents felt interest rates kept too low for too long was a problem, which doesn’t bode well for a recovery considering that seems to be our solution at the moment.

The survey was based on completed questionnaires from 339 CEOs and senior bank officers.

(photo: howardgees)

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