Comments on: Can Silicon Valley fix the mortgage market? Thu, 18 Jul 2013 20:14:19 +0000 hourly 1 By: ptiffany Thu, 26 Apr 2012 20:51:29 +0000 This is not a big data problem. The largest mortgage loan originator and servicer was Countrywide, now Bank of America. The computerized Countrywide Loan Underwriting Expert System (CLUES) processed all the Uniform Residential Loan Applications (URLA), Federal Form 1033, to determine all the variations of loan criteria, summarized with a decision: “RECOMMENDED” or “NOT RECOMMENDED”.

The problem is not that the extensive and detailed database was inadequate, nor the underwriting – aka “Artificial Intelligence” – risks not determined. The problem was that a lot of people decided to ignore these “recommendations” in pursuit of higher returns.

The phony “complex” risk models created to justify high-risk low-doc & no-doc loans (not just subprime) to known unqualified borrowers weren’t questioned as to one basic assumption: “Housing prices will always go up.”

We don’t need any geniuses from Silicon Valley or anywhere else to tell us what went wrong with the casino culture of Countrywide, Fannie Mae, Freddie Mac, IndyMac, AIG, Citigroup, JP Morgan Chase, Wells Fargo and now Bank of America.

I used to work for two of these entities. The fraud was well known, not exactly a secret to thousands of employees including managers and executives. What’s being done about changing this casino culture? Outside some curious pieces on “60 Minutes” and detailed discussions on “Moyers & COmpany”, essentially nothing beyond talk. The Department of Justice continues to sit on its hands and bemoan the lack of funding to pursue these elusive thousands of potential witnesses.

BTW, this was (and is) not primarily a subprime loan crisis as the media keeps harping, but a serious problem with obsessive gambling involving low-doc-no-doc loans of a large portion of ARM loans with losses guaranteed 100% by the federal government. This hasn’t changed one whit.

The Tenth Percenters win. Their capital is preserved and they continue to receive better than ten percent returns from the casino “banks”.