A reader comments: Yes, private sector loans triggered subprime crisis

McClatchy's Kevin Hall is correct in his analysis of private sector loans as the culprit that initiated the crisis. I was the chief credit officer of a bank subsidiary and managed a portfolio of $12 billion in subprime loans.

I met annually with Comptroller of the Currency examiners who would spend 3 weeks with me reviewing reports and evaluating the overall portfolio composition for credit quality and measuring performance trends. Our examines always concluded with positive ratings and reviews because we knew how to manage the risk and we stayed away from all of the crazy programs.

The mortgage bankers and brokers were under state oversight however the States did not have the same review criteria as the OCC, or Office of Thrift Supervision. If you were to look at borrowers who are now in foreclosure you will find that the majority of the mortgages were not for purchases but for refinancing. A number of these borrowers already had credit problems in 2003, 2004, 2005, and it was Mr. Broker who continually churned the borrower whenever rates went down.

The mistake Bernanke made in 2005 is that when he began the march upwards in interest rates he had no idea how many people were about to go over the cliff with higher payments. When you look back in 2003-2005 subprime loan performance was favorable. What made it appear favorable or at least gave the appearance is that homeowners were continually refinancing. Had borrowers remained static you would have seen their true performance. The mortgage broker and banker all had an incentive to churn the borrower and that was their fees.

Someone needs to look at the rating agencies such as S&P and Moodys. How could they possibly rate his crap paper triple A ? I was shocked at some of the ratings they assigned securitization pools. I can tell you from first hand experience that the individuals who went out to complete the due diligence right before a securitization were young college graduates who never made a loan, and had no idea about credit quality. Everything was scripted and they pretty much followed a Q & A format. In my opinion there was such a strong financial incentive for the rating agencies there was no way they would call a pig a pig.

The guys that engineered these programs of Option ARMS, 40 and 50 year amortizations, and Interest Only were the Mortgage Brokers and Mortgage Bankers. The OTS and OCC never saw these loans for review because they had no oversight with companies such as New Century, Option One, Ameriquest etc.

As far as the Community Assistance Act, the intent behind CRA made sense and in my opinion worked. In fact CRA loans were made well before subprime. CRA loans never had the adverse performance results that we have today. The reason is that the guidelines made sense, and there were underwriting standards that made sense for borrower. The Brokers could care less about the borrower after the loan was funded and in some instances Brokers targeted the CRA borrower. You won't find a reputable financial institution offering a CRA borrower some of the programs offered by Brokers.

Where I find fault with Fannie and Freddie is in their underwriting standards. Too many of their loan decisions were driven by automated underwriting engines know as Desktop Underwriter and Loan Prospector. These software models were developed by Fannie and Freddie but in my opinion the models did not accurately measure the true risk profile of the borrower. It was pretty much FICO score driven, Debt to Income, and LTV. If those components were favorable then the loan was approved. Lending is a lot more than those characteristics.

Thanks for allowing me the opportunity to respond to your article.

Sincerely,Lou FranziniExton, Pa.