Certain forms of alternative documentation are appropriate

Hardly news, perhaps, when everybody with a dollar left to lend is being more cautious about who they lend it to, but in case you missed today's Inman News story on private mortgage insurer Radian Guaranty Inc.'s decision to stop insuring limited documentation "alt-A" loans, it might still serve as a nice chaser for this 80-proof shot of insight into the underwriting of "liar loans."

The shot of insight comes in the form of a story in The Oregonian about a memo that originated from JPMorgan Chase, detailing how to fool the company's automated loan underwriting system, "Zippy," when making stated-income, stated-asset loans.

The memo recommended three "handy steps" to getting around Zippy's objections to a loan. From the story:

"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.

If all else fails, simply inflate the applicant's income. Inch it up $500 to see if you can get the findings you want. Do the same for assets."

And yes, the memo is for real. Several mortgage brokers provided copies to state regulators (who have no jurisdiction over Chase), The Oregonian reported, and Chase verified the memo originated from within the company. The e-mail did not reflect official policy and it's unclear how widely it was circulated.

A Chase account rep who sent the "Zippy Cheats & Tricks" memo out this month in an e-mail message was fired, even though she says she did not write it, and that it was irrelevant because Chase had already stopped making stated-income loans.

As for Radian, the company says it will stop insuring alt A loans April 30. "While certain forms of alternative documentation used to verify assets and income are appropriate with a disciplined underwriting process, the stated programs will no longer be insurable," the company stated.

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