I am confident that Van McCoy did not have bank fraud in mind in 1975 when he and the Soul City Symphony introduced the wildly popular song, “The Hustle”! Instead, he had a much more modest and positive concept in mind – teenagers and young adults discovering a new beat and novel moves for dancing together… whether as couples or in a line dance.
However, much to the chagrin of countless home buyers and federal regulators, in 2007, “The Hustle” became the corporate code name for an intricate scheme to speed up the processing of home loans. “The Hustle” was also called “High Speed Swim Lane” (HSSL) – designed to cut down on as many of the standard underwriting steps as possible in order to remove barriers and bumps (so-called “tollgates”) between loan application and closing. The simple rationale that Countrywide Mortgage (then the nation’s largest mortgage provider) used was – the more applications we process and close, the more profits we’ll rake in! Because of (then) common assumptions regarding the housing market (ie. prices will never move down) they exercised little or no caution regarding the possibility that applications might be fraudulent or the loan might turn out to be too risky.
This heightened profit motive led Countrywide to operate under the theme “Loans Move Forward, Never Backward”. In an effort to guarantee maximum loan revenue, they restricted experienced underwriters to the riskiest loans while turning over all other applications to less experienced loan staff (many of whom had been considered unqualified to answer borrower queries). Needless to say, Countrywide’s loan default rate (“defect rate”) soared, approaching as high as 40%— almost ten times the national average.
If Countrywide had been financially responsible for this abjectly irresponsible scheme, the issue would largely have become moot – because executives would quickly realize that they needed to kill “The Hustle” and return to “best practices” underwriting. However, these mortgages were all “guaranteed” by Fannie Mae or Freddie Mac. Making matters worse, executives never warned those federal agencies of their loosened standards and (worse) even awarded bonuses to staff who successfully rebutted questions from the government about loans! As we know, Bank of America offered to buy out Countrywide in January of 2008, the deal closed in July, and Bank of America did not order any reforms to “The Hustle”.
Last week, however, the “chickens have come home to roost”! The U.S. Department of Justice brought its first civil fraud suit related to the “toxic” mortgage loans sold to big Wall Street financiers (that created the calamitous crisis from which we still suffer). The U.S. has accused Bank of America of causing taxpayers more than $1 billion in losses! Commenting on the suit, Manhattan U.S. Attorney, Preet Bharara said: “The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope. Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.” http://www.chicagotribune.com/business/sns-rt-us-bankofamerica-fraud-lawsuitbre89n171-20121024,0,2690129,full.story
Van McCoy never imagined that “The Hustle” would be so dangerous, or so costly!