The rating agency found there were endemic failings right across the mortgage application process; from misrepresentations by borrowers and brokers, right through to poor decisions from the providers.
Additional research by BasePoint Analytics LLC revealed that as many as 70 per cent of loans between 1997 and 2006 – with the majority coming from 2005 and 2006, where the borrower defaulted on their mortgage payments, were found to have fraudulent information in the application.
In its report, ‘The Impact of Poor Underwriting Practices and Fraud in Sub-Prime RMBS Performance’, Fitch said: “The 2006 non-conforming vintage performance is remarkable for the magnitude of early mortgage defaults. Fitch attributes a significant portion of this early default performance to the rapid growth in high-risk ‘affordability’ features in non-conforming mortgages.
“Moreover, in the absence of effective underwriting, products such as ‘no money down’ and ‘stated income’ mortgages appear to have become vehicles for misrepresentation or fraud by participants throughout the origination process.”
Fitch also believed that with house prices now falling across America, more defaults were likely as people who found themselves in trouble were not able to refinance or sell the property and rely on increases in property value.
Mark Sismey-Durrant, chief executive of Heritable Bank, said: “The spectre of fraud is a huge worry. There was widespread mis-selling as they don’t have anything like MCOB. These are big numbers and big problems and just shows the disastrous state of the US market which completely forgot about risk.”
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