Fraud

Was the SunTrust Agency “Shortcut” the Biggest Fraud in Mortgage History?

Via http://www.ritholtz.com

After reading Gretchen Morganson’s article on the front page of the business section last week (“Note to New S.E.C. Chief: The Clock Is Ticking“) we are confronted with a massive potential legacy loan fraud at SunTrust Bank against Fannie Mae — it seems to me that this is very similar to the $3 billion in potential damage awards in the Countrywide case… U.S. v. Bank of America/Countrywide, et al

I spoke with a veteran loan originator with knowledge of the SunTrust Agency“Shortcut” (great name!) loan program told me it was one of SunTrusts’ top selling loans during the bubble years and sold exclusively to Fannie Mae. The fraud occurred from circa 2005 to 2008, as SunTrust retail loan officers, wholesale account executives, and approved mortgage brokers routinely “laddering” income and asset inputs into the SunTrust “Fannie Mae custom DU” loan approval system in order to achieve the “Shortcut” finding, which then prevented SunTrust loan underwriters from doing proper due-diligence.

These loans were in fact “Alt-A” loans — your traditional low doc loans, with missing income and spotty asset verification such as tax-returns, w-2′s, pay stubs, bank statements etc — but originated using much more lenient fully documented loan guidelines and interest rates and sold to Fannie Mae as “full-doc”.

Bottom line: Agency “Shortcut” loan programs, exclusively originated by SunTrust, made loan underwriters impotent in their due-diligence; these Alt-A loans that should have carried higher interest rates and been originated using more stringent guidelines; were sold to Fannie Mae as premium full-documented loans, and have resulted in abnormally high default and loss rates relative to true “fully documented” loans.

All of these were top items in the $3 BILLION “Countrywide Hustle” case announced last October.

The big difference, however, between the Countrywide “Hustle” and the SunTrust “Shortcut” fraud is that the “Hustle” concerned only $6 billion in origination. The “SunTrust Shortcut” originations — per Gretchen Morganson’s article — were “$10s of billions of dollars” perhaps making it the largest whole loan fraud in the history of the mortgage and housing crisis.

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