NEW YORK (CNNMoney.com) — Richard Bitner opened his own mortgage shop in 2000, and had the good fortune to bail out of the business in 2005, before the housing crisis hit.
He saw the shoddy lending practices that got us into this crisis first hand, and has chronicled them in his book, “Confessions of a Subprime Lender.” By the time he quit, said Bitner, “Lending practices had gone from borderline questionable to almost ludicrous.”
The subprime siren. He and his two partners ran Dallas-based Kellner Mortgage Investment, a small subprime lender that issued about $250 million in loans annually. The firm worked through independent mortgage brokers, and then sold the loans it closed to investors or to larger lenders, such as Countrywide Financial, which was recently bought by Bank of America (BAC, Fortune 500).
Bitner, like so many other subprime lenders, was drawn to the field by the fat profits it promised – these loans paid three to five times more than prime loans. But, says the 41 year-old married father of two, he also took pride in the idea that he was helping people with damaged credit become homeowners.
Still, things eventually got out of control.
The last straw. One of Bitner’s last clients, which he says was turning point for him, was Johnny Cutter and his wife Patti, from South Carolina. The deal illustrated what had become the fundamental problem with subprime lending: Nobody was bothering to determine whether borrowers could actually afford to make their payments. And so the Cutters, like millions of others, became a foreclosure waiting to happen.
“What really got to me,” said Bitner, “is that we [usually] put people in positions to not fail. This loan didn’t fit that.”
The Cutters wanted a loan to buy a newly built, 1,800 square-foot house, but had been turned down for a mortgage twice because of bad credit. After that, they scrimped for three years and saved enough for a 5% down payment.
But, they still had only $2,200 in combined net monthly income, poor credit and employment histories, almost zero savings and no history of even paying rent. Their mortgage payment, property taxes and insurance came to $1,500, leaving them just $700 a month for all other expenses.
Patti fell ill right after the closing and the couple never made a single payment. Since the Cutters defaulted immediately, Kellner Mortgage was contractually obligated…
