During the current mortgage meltdown, the press has turned its focus on the most obvious culprits -- the irresponsible, and often unethical, loan officers, mortgage brokers, appraisers, Realtors, and even the borrowers. Those are the people I like to call the riggers -- the people you usually think of when you picture someone taking out a loan or buying a home.

Working behind the scenes, however, are other culprits who facilitate and often encourage the riggers to commit fraud. These are the people I call the triggers. When the triggers and the riggers got together, they ignited the blaze that has engulfed the mortgage industry. The riggers spilled the gas, and the triggers dropped the match. Now homes, communities, cities, states, and the entire nation are ablaze.

Recently, while talking to a senior underwriter for a major Wall Street bank, she shared with me that she had witnessed the sinister inner workings of the lending industry first hand. The underwriter's job is to provide an unbiased assessment of the risk level of a particular loan. This particular underwriter has always taken great pride in protecting the lender/investor from approving overly risky loans and protecting the borrower from becoming saddled with debt that he or she cannot repay.

She and her colleagues did their best to identify bad loans and sound the alarms, but the bank's managers and account executives prevented them from doing their jobs. The underwriters were expected to let the loans slide through the approval process despite the fact that many of these loans should never have be approved. The underwriters were told that they should be happy to have jobs.

Feeling the stress of being forced to act unethically, many of her colleagues resigned. This particular person felt that it was her responsibility to remain on the job and call attention to this problem from the inside, where she could witness this institutional fraud with her own eyes. Currently, I cannot disclose the identity of my source or the bank she works for.

SLC: Submit, Lock, and Close

What this senior underwriter and her colleagues have witnessed can be summed up in a single acronym: SLC (Submit, Lock, and Close). As soon as a loan application is submitted it, they lock their focus on it and move it through closing. It's like a sweat shop for the loan industry, an assembly line, no questions asked, where they approve and process as many loans as possible, so they can make money and stay in business.

As underwriters, they have called their managers' attention to blatant signs of fraud -- fraudulent income and assets, questionable transactions, and so on. The managers have told them to let it go. They call it a "business decision," a "relationship building tool." In fact, it's fraud, plain and simple.

How It Works

In the good old days, lenders viewed underwriters as the good guys and gals, protecting lenders from approving bad loans. Most recently, however, brokers and account executives, driven by greed, have found ways to work directly with one another to bypass the underwriter.

Here's how the relationship typically develops:

1. A prospective borrower visits a mortgage broker to take out a loan.

2. The loan officer (working on behalf of the broker) has the borrower complete the loan application and then collects all the documentation, packages it up, and sends it to the lender/investor for approval.

3. All files go to underwriting.

4. A senior underwriter examines the documentation and discovers a problem; for example, a fraudulent pay stub. He reports the problem to his manager. The good news is that the senior underwriter has done his job to protect the lender/investor.

5. The loan officer is informed that the loan application he has submitted has been rejected.

6. The loan officer reports the problem to the manager of the mortgage company.

7. The manager of the mortgage company contacts the account executive for the lender/investor and threatens to pull his 20 closings a month, which would negatively affect the income of the account manager.

8. The account executive approaches the manager of the underwriting department and reminds him that they both get paid on volume and that this loan needs to be approved in order to preserve future business.

9. The underwriting manager instructs the senior underwriter to approve the loan and simply document any concerns that she may have in order to protect herself. The manager justifies approving the loan as a business decision that is beyond the senior underwriter's pay scale.

As you can see, the system in place is designed to protect the lender/investor, and it would work well if the underwriters were allowed to do their jobs. The trouble is that, in this case, greed has turned the system upside down, exposing the lender/investor to loans that are likely to have high default rates.

In the process, the mortgage broker/loan officer loses all respect for the underwriter's decisions and calls the account executive on every file. The account executive calls the manager who rubber stamps every file, overriding the underwriters, who have no power to stop it. According to my source, "The managers would overturn every decision to deny a loan, every request for complete documents, bank statements, or pay stubs. Everything we questioned in our capacity as underwriters was overridden."

The Hype

The underwriters were reminded daily of all the companies like theirs that were shutting down as a result of the mortgage meltdown and that their company was one of the few survivors. They were told to keep closing loans. With all of those other companies going out of business, they now had a golden opportunity to increase market share and become the lender of choice. They were told that management was aware and that they were over staffed, but because they were doing so much business, nobody would have to be laid off. They didn't have to worry about having a job as long as they continued to close loans. "It's a bad time to be looking for a job in this industry, so we all need to work together."

From my perspective, this is just one of the pieces that contributed to the mortgage meltdown and why it will continue until the underwriters are allowed to do their jobs. As I have always stated, it takes more then one to hold a "fraud party." Most people would never imagine that the lending industry functions as a good ol' boys network, with favors being traded to the detriment of consumers, the industry, and the entire economy, but that's exactly what's going on, and it continues even with all the bad press swirling around.

This situation has been turned into the authorities, and FBI interviews have begun. To the credit of this lender/investor, once they were presented with the information, they acted quickly and have already released one of the offenders from employment. There is more that needs fixing, however, than simply removing a few bad apples. This case demonstrates several problems:

• Lenders being pressured to approve more loans to feed Wall Street's insatiable appetite for mortgage-backed securities.

• Lowering the FICO score to allow more borrowers to qualify for mortgage loans.

• Risky products, including adjustable-rate mortgages, being pushed on unsophisticated borrowers.

• A system of checks and balances that was designed to curb irresponsible lending but that was all too easy to circumvent.

• Greed, pure and simple.