Reinventing mortgage due diligence

My friend and former employee, David Cooper, was featured with his service dog, Parnelli (named for race car driver Parnelli Jones), on a National Geographic Wild documentary series “Blue Collar Dogs” this week.

David lost his sight when he was 17, in a warm-up run for a ski race on Aspen Mountain. I first met him in June 2001, when he applied for a summer internship with my first company, Murrayhill. I was impressed by David’s desire to learn the mortgage industry and hired him, thinking he would eventually make a good analyst on our credit risk management team.

Should due diligence firms be viewed as experts on mortgage securitizations, in much the same way accounting firms are viewed as experts on audited financial statements?  Some in our industry say no.  I say yes.  Here's why.

Up until last Thursday, when we've wanted to get together as a company for a meeting or for training, we've had to use makeshift space in our offices.  Our offices were opportunistically leased from a company that had too much space in the bad market of 2009.  We took it furnished and finished, and it was much nicer than we probably would have been willing to spend money on.  But it was the back office space of the prior tenant, so it didn't come with some of the basics you expect in an office, like a reception area or conference rooms.

Since the start of the mortgage crisis, I've maintained my position that everyone who participated in the market was in some way guilty of bringing it down.  Originators made fraudulent loans; investors bought pools they knew were too risky; diligence firms didn't disclose what they knew; rating agencies didn't understand the collateral; issuers were willing to securitize anything; and borrowers lied and cheated to get a loan for houses they couldn't afford.

I'm not known for sugar-coating.

If they weren't the root cause of the subprime mortgage crisis, NINJA loans certainly fueled the flames.

NINJAs are No Income, No Job, no Asset loans. As the names imply, these loans were given to people based on income they claimed to make with no requirement that borrowers back up their assertions with pay stubs or tax returns. A credit score was often enough documentation to get a borrower qualified.