[Texgreen] Automated subprime loan technology originated in Austin

[Roger Baker]

Everybody got home loans because the software apparently forgot to =20
ask the right questions but the whole banking world learned to =20
benefit by bundling and selling enticing but predatory loans =20
everywhere. The end result is that whole sections of cities like =20
Cleveland and Atlanta are becoming vacant and undesirable. Here is a =20
story in today's NYT on that too. -- Roger

<http://www.nytimes.com/2007/03/23/us/23vacant.html?hp>

Foreclosures Force Suburbs to Fight Blight

By ERIK ECKHOLM
Published: March 23, 2007

SHAKER HEIGHTS, Ohio =97 In a sign of the spreading economic fallout of =20=

mortgage foreclosures, several suburbs of Cleveland, one of the =20
nation=92s hardest-hit cities, are spending millions of dollars to =20
maintain vacant houses as they try to contain blight and real-estate =20
panic...

                 ****************************************

<http://www.nytimes.com/2007/03/23/business/23speed.html>

The Subprime Loan Machine

By LYNNLEY BROWNING
Published: March 23, 2007

Edward N. Jones, a former NASA engineer for the Apollo and Skylab =20
missions, looked at low-income home buyers nearly a decade ago and =20
saw an unexplored frontier.

Through his private software company in Austin, Tex., Mr. Jones and =20
his son, Michael, designed a program that used the Internet to screen =20=

borrowers with weak credit histories in seconds. The software was =20
among the first of its kind. By early 1999, his company, Arc Systems, =20=

had its first big customer: First Franklin Financial, one of the =20
biggest lenders to home buyers with weak, or subprime, credit...

By 2005, at the height of the housing boom, First Franklin had =20
increased the number of subprime loan applications it processed =20
sevenfold, to 50,000 every month. Since 1999, Mr. Jones=92s software =20
has been used to produce $450 billion in subprime loans...

Automated underwriting is now used to generate as much as 40 percent =20
of all subprime loans, according to Pat McCoy, a law professor at the =20=

University of Connecticut who has written on real estate lending...

=93Used properly, automated underwriting is a wonderful thing,=94 =20
Professor McCoy said. The problem, she said, comes when lenders =20
customize it to approve the wrong borrowers.

During the housing boom, speed became something of an arms race, as =20
software makers and subprime lenders boasted of how fast they could =20
process and generate a loan. New Century Financial, second to HSBC in =20=

subprime lending last year and now on the brink of bankruptcy, =20
promised mortgage brokers on its Web site that with its FastQual =20
automated underwriting system, =93We=92ll give you loan answers in just =20=

12 seconds!=94...

Mr. Jones founded Arc Systems in 1984 to produce software for =20
Suwannee County, Fla., which used it to track when policemen issued =20
parking tickets and when jail wardens fed inmates. Then in 1992, a =20
local subprime lender called Home Inc. asked Mr. Jones to develop a =20
program to screen risky borrowers. In 1997, amid the adoption of the =20
Internet, =93we ditched that software and went Web-based,=94 Mr. Jones =
said.

Since 1999, his software has been used by major subprime lenders =20
including HSBC and its former Household subsidiary, Deutsche Bank and =20=

the Virginia Housing Development Authority. Lehman Brothers and the =20
Ellington Management Group, a big seller of mortgage-backed =20
securities, have used LendTech to analyze pools of billions of =20
dollars of subprime loans that they sold to big institutional =20
investors...=