Confessions of a Subprime Lender: 5 Reasons the Subprime Market Crumbled

By Melissa Dittmann Tracey


Slowing home sales, a tightening credit market, record-high foreclosures — how did we get to this point? Richard Bitner’s book Confessions of a Subprime Lender (Wiley, 2008) gives a close-up look at how the worst credit crisis in modern history came to be. Bitner, who founded a subprime mortgage company in 2000, left the business in 2006 after foreclosing on a subprime borrower that never should have been approved for a loan in the first place. While being careful not to blame any single source, Bitner gives an interesting view on what went wrong in the subprime mortgage market and how to fix it.



In 2000, as housing prices grew out of reach for buyers, more creative financing crept in and subprime lending became big business. Wall Street wanted its hands on more of these loans, and the hot housing market spawned a wave of new subprime companies. By 2004, 75 percent of borrowers were buying a home without using a down payment or proving income.

But by 2006 the subprime market started falling apart; Borrowers were defaulting on loans and subprime companies were going out of business. Bitner says these are some factors that caused the subprime market to crumble:

1. Greed. Mortgage brokers made more money if they sold loans with higher fees and interest rates. So borrowers would often be steered toward riskier products, even if a more traditional (and less risky) loan were available. “My income was directly proportional to the revenue I generated, and subprime was three to five times more profitable than any other type of loan we securitized,” Bitner says. “I saw no logical reason to sell something that made less money and carried no competitive advantage.”

2. Rampant fraud. Bitner estimates that more than 70 percent of all brokered loan applications submitted to his company were in some way deceptive, which meant everything had to be double-checked and verified. “The practice of massaging loans, making them appear different from what they are, became standard operating procedure,” Bitner says. “With little accountability for their actions, brokers [were] left to decide how far they’re willing to go.”

Common cases of fraud included altering income documentation, giving a borrower an adjustable rate mortgage without explaining how it works, or disclosing lower rates and fees to a borrower but then increasing the figures right before closing.

3. No standards. Everyone wanted to cash in on the subprime business, even if they didn’t know how the business worked. “With few rules and minimal consumer protections, abusive behavior flourished,” Bitner writes. The number of mortgage broker companies increased by 50 percent between 2001 and 2006, peaking at 53,000 in 2006. Meanwhile, the number of new loan originators working for mortgage brokers grew by 100,000.

Yet no national standard existed for licensing mortgage brokers and loan originators. Bitner says the industry needs to raise its standards and develop a system for accreditation. “The recent debacle has given brokers a reputation similar to used car salesmen,” Bitner writes. “Although the bankers and brokers associations don’t have a history of working together on issues, a collaborative effort to accredit loan originators would be a key step to rebuilding credibility for the industry.”

4. Securitization of mortgages. Mortgage securitization fragmented the industry, Bitner says. Previously, banks would provide the money to fund a mortgage, but with securitization, the funding got divided into several components.

Here’s how it works: Brokers originate the loan, a mortgage lender funded it, and a lender then sold it to another financial institution or used an investment bank to package it into a mortgage-backed security. Investors then bought them for their portfolio. “The problem in today’s housing market exists because the investment banks packaged high-risk loans into securities and the rating agencies assessed them as investment quality,” Bitner writes. “If the investors who purchased the securities understood what they were buying, the outcome would likely have been different.”

5. Ultra-relaxed underwriting standards. As the subprime market took off, a pricing war among subprime lenders emerged. In order for lenders to keep their revenues up, they needed to fund more borrowers, leading to less restrictive underwriting. “It’s easy to lose sight of what constitutes a good credit risk when you spend all day looking at marginal deals,” Bitner writes.

Indeed, riskier products emerged, such as loans that required no down payment, proof of income, or even a history of paying rent. One loan product even allowed borrowers with credit scores of 580 and a 90-day-late payment in their housing history to qualify for 100 percent financing.


“During the first six months in business, I felt no more qualified to pilot the Space Shuttle than to be the president of a subprime lending company. Seven years in mortgage banking provided a solid foundation, but coming from the ranks of companies like GE Capital, my schooling was largely driven by a conservative mind-set. Lending money to borrowers with bad credit was never a part of the curriculum. When I first learned about subprime mortgages, the high-risk nature of the business made me think it was best suited for those who suffered from low morals or head trauma. Lending money to people with bad credit just seemed like a terrible idea. It wasn’t until I got a taste for this business that my feelings started to change.”


Richard Bitner has more than 14 years in the mortgage industry. In 2000, he founded Kellner Mortgage Investments, a subprime mortgage company with 65 employees and $225 million in annual loan volume. Bitner got a distaste for the business in 2006, leaving his business about a year before Kellner closed and the subprime market started to crumble. He is now the managing director of Housing Wire. Visit his blog:

Listen to a podcast with author Richard Bitner >

Melissa Tracey

Melissa Dittmann Tracey is a contributing editor for REALTOR® Magazine, writing about home & design trends, technology, and sales and marketing. She manages the magazine's award-winning Styled, Staged & Sold blog.

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  1. Buying online is very easy and helpful in analyzing the product price, Quality and warranty. And it makes shopping very easy and effortless, So online marketing has become an essential thing.

  2. As a 10 year seasoned mortgage originator and owner of a Mortgage Brokerage, I completely agree with Mr. Bitner’s assessment of the issues at hand. I worked on both the retail and wholesale end of the industry and have seen product come into the market that just didn’t make sense and was forced to sell it due to a growing client desire to obtain that sort of financing. I provided all the educational tools to the mortgage brokers that I sold to so they could educate the public before leaping into the high risk products being advertized everywhere. Now almost daily I have to explain what really happened to the market to family, friends and clients beyond what the media has told us. I strongly recommend this book to all who want to know the non-media hyped version of the truth behind the credit crisis. Especially to people in the mortgage, real estate and financial services industries.

  3. R. Shelton

    Mr. Bitner’s generalized comments are right on, but fall far short of focusing on the whole problem. For example, under HUD, RESPA’s regulations, if enforced, would have controlled the majority of the problems. In 1996 they issued new standards for disclosing the Yield Spread Premiums (YSP) that miraculously appeared on the settlement statements. Even escrow officers, knowing it was the clients money, refused, on legal grounds, to disclose or merely stated it was just money going from the lender to the brokerage company. A good loan officer will be at the loan signing to answer any and all questions pertaining to that loan.
    This is why so many folks found, at the last minute, they had to come up with more cash to close the escrow, or lose their loans and their prospective home. Both the broker and the lender knew they were padding the previously undisclosed fees for their personal gains and that according to RESPA, the Good Faith Estimate had to be reissued if the resulting costs exceeded $100. Again, under RESPA, HUD and FHA were totally ineffective and derelict in their enforcement of these rules. Both the Mortgage Bankers Association and the Mortgage Brokers Association were duplicitsis in refusing to keep their folks in line. It was GREED from the bottom to the top of the lending food chain, including those who knew they were beating the system by fraudulently misstating information on the 1003 loan applications. It includes unscrupulous mortgage brokers and loan underwriters who aided and encouraged fraud by processing doctored loan applications.
    I am not confident Mr. Bitner’s attempt at setting the record straight is really sincere. Ater 14 years in the business and 6 years in subprime ripoffs he KNEW the score and obviously left in 2006 because he KNEW it had played out, and not out of remorse for the damage his firm had done to a heck of a lot of innocent trusting people. How many times did he allow his people to tell a client the commission was one point only to walk out with 2-3 points hidden on the back end? Perhaps this book is his attempt at Mia Copa, but I suspect he hopes to just make more money off the experience. Sorry Mr.
    Bitner, “integrity” is how you live, what you stand for, and not just what you report it to be. “You tell the truth by the results.”

  4. Zparker

    Buying online is the worst that you can do to yourself. If you don’t value your knowledge, your eager in knowing who you are dealing with, on who you are trusting your hard earned money, and if you are soooo lazy to get face to face with the person selling you anything, then doing business online is for you. You have to see the person you are dealing with so you may hopefully see the expression in his/her face while he is continually using his sweet smile everytime he is putting/adding charges on you, then maybe you will have a second chance on thinking twice before signing your life on the documents. Doing that maybe our housing business will not be so bad as it is now and not too many unqualified couples is not foreclosing and worse homeless right now. Don’t just listen to what “Pedro” say. A little bit of using common sense (brain) less greed and excitement could save all people money, kids future and good life.