The Rise And Fall Of Subprime Mortgages

As 50 states jointly investigate the mortgage industry amid allegations of improper foreclosure practices, a new book released this week chronicles the rise and fall of the subprime mortgage business. Guest host Jacki Lyden speaks with author Michael Hudson about his book "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America — and Spawned a Global Crisis." NPR Senior Business Editor Marilyn Geewax also joins the conversation.

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JACKI LYDEN, host:

I'm Jacki Lyden. This is TELL ME MORE from NPR News. Michel Martin is away.

Coming up, pink ribbon reminders of breast cancer awareness month are just about everywhere. That's good, right? Wrong, says an activist who believes that the culture of pink ribbons is pesky and patronizing and not doing enough. That's in a few minutes.

First, though, a book about drugs, lies and mortgages - subprime mortgages. Michael W. Hudson wrote "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America - and Spawned a Global Crisis." The book fills in the back story to the housing crisis and mortgage mess. And the author is with us in our studio. Welcome Michael Hudson.

Mr. MICHAEL W. HUDSON (Author, "The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America - and Spawned a Global Crisis"): Thanks for having me, Jacki.

LYDEN: And also with us is NPR senior business editor Marilyn Geewax. She's here to bring us up to date on this story. Thanks for coming in, Marilyn.

MARILYN GEEWAX: You're welcome.

LYDEN: Michael Hudson, would you read us, just from the first paragraph of the introduction to your book, please. It really sets up this whole phenomenon, I think.

Mr. HUDSON: No problem.

(Reading) A few weeks after he started working at Ameriquest Mortgage, Mark Glover looked up from his cubicle and saw a coworker do something odd. The guy stood at his desk on the 23rd floor of downtown Los Angeles' Union Bank building. He placed two sheets of paper against the window. Then he used the light streaming through the window to trace something from one piece of paper to another, somebody's signature.

LYDEN: So, what you're describing here is forgery, but what's going on here? Tell us.

Mr. HUDSON: This is basically the heart of the boiler room culture of the subprime mortgages industry.

LYDEN: Boiler room, what does that mean?

Mr. HUDSON: Boiler room, basically making phone calls, calling people and saying whatever it takes to get them to sign up for refinancing and then doing whatever it takes with the paperwork, whether it's forging signatures, whether it's creating fake tax documents to push the loan through.

LYDEN: Now, you go on to paint a devastating portrait of routine fraudulent behavior in a high stake sales environment fueled by alcohol and drug use, a whole frat room culture. And you really do profile Ameriquest. Tell us a little bit about that company.

Mr. HUDSON: Ameriquest actually grew out of a little savings and loan in Orange County, California, Long Beach Savings and Loan, which pioneered modern subprime mortgage market. It started in the late '80s and, you know, grew fairly rapidly through the '90s. But then by this past decade, Ameriquest had grown into this huge behemoth that was putting out $80 billion a year in subprime loans.

LYDEN: And as we all know, the subprime mortgage business itself grew phenomenally. I think your own book says something like 60 percent between 2003, 2004.

Mr. HUDSON: Right.

LYDEN: Now, of course, Marilyn Geewax, we're seeing a foreclosure wave and all kinds of improprieties concerning the processing of foreclosures. What happened?

GEEWAX: Well, you know, initially when this started breaking back in 2007, the impression around Washington certainly was that a lot of people did a lot of dumb things that borrowers borrowed too much. And people, their appetites were too big for houses and it just seemed to be human nature.

But the longer this has gone on and the more people have started looking into it, it does seem that there's growing evidence that actually these weren't just people making bad decisions, but that there were actually fraudulent activities going on.

In recent weeks, there's been some evidence that's emerged, and lenders have actually admitted, that there have been legal document problems. These so-called robo signers were just signing one document after another without actually checking the paperwork. So the banks themselves admitted to some of these problems and had a voluntary foreclosure moratorium. They said we'll stop foreclosing on people while we straighten this out.

Well, now the banks are saying, okay, we've gone back over the paperwork, everything's fine. We're going to proceed with these foreclosures. But the point we're at right now is that there are a lot of prosecutors who aren't buying that story. And now there's really an effort at a broad prosecutorial investigation to see if there was fraud as well.

LYDEN: You're listening to TELL ME MORE from NPR News. I'm Jacki Lyden. And I'm speaking with NPR business editor Marilyn Geewax and book author Michael Hudson about the foreclosure crisis.

Michael, the picture you paint, Marilyn just talked about, seeing actual predatory practices, in this Saturday's weekly address, President Barack Obama talked about the Wall Street reform and Consumer Protection Act signed into law this summer. Let's just listen to a clip from that.

President BARACK OBAMA: This is a bill designed to reign in the secret deals and reckless gambling that nearly brought down the financial system. It set new rules so that taxpayers would never again be on the hook for a bailout if a big financial company went under.

LYDEN: Secret deals and reckless gambling. Well, your book certainly paints a picture of that. Why don't you tell us about some of the individual - you collected so many stories of people who were ripped off and flat out lied to and undermined. Talk about a couple of the cases that stick in your mind.

Mr. HUDSON: One example was a lady that I talked to down in Jacksonville, Florida, Carolyn Pittman. And she and her husband had a FHA loan and they were getting by. And when her husband passed away, you know, she started, you know, having trouble making the payments. And she started getting calls from Ameriquest Mortgage. And according to Ms. Pittman, they promised her that they would reduce her payments and give her a better deal. And so she took out the mortgage.

And then she realized that she really couldn't afford it. And pretty soon she started getting calls from a company called Long Beach Mortgage, which she didn't know at the time, but actually shared corporate DNA with Ameriquest. They had been one company at one point and then later had spun off. She got another mortgage from Long Beach, couldn't afford that, and eventually got a mortgage, a third mortgage from Ameriquest.

And so by the time that she was flipped through these three loans, her monthly house note went from roughly $500 a month to $1,000 a month. And she just couldn't keep up.

LYDEN: And both those companies that you just talked about, Long Beach and Ameriquest, were started by the same person, Roland Arnall, who you write a lot about in this book. Before I ask you just who he is, tell me the kinds of pressures this man, through his empire, put on people actually making these deals, mortgage lenders and brokers.

Mr. HUDSON: Right. One of the threads that run through Roland's story was there always this pressure to produce. You had to do what it takes to produce loan volume. And he felt like loan volume solved all problems. You just - if you made bad loans, if you could double and triple the volume of loans that you were making, then, you know, you could kind of outrun your, quote, unquote, "mistakes."

LYDEN: And he passed away last year?

Mr. HUDSON: He did. Well, he died in 2008.

LYDEN: Didn't he also have something to do with the fact that at one time it was considered really bad form to take out a second mortgage? And over time, of course, you were supposed to take equity out of your house to do smart things.

Mr. HUDSON: Right. Well, it wasn't just him. It was, you know, it was also the biggest banks in America starting during the Reagan era, really tried to change the psychology of credit. It used to be, you know, this was not something you did. There was a little bit of shame in the idea of mortgaging the homestead, taking out a second mortgage.

But then it got to the point where it was, oh, there's cash, you know, hidden in my house, you know. I can make $50,000 just by taking out a second mortgage. And it went from something that was a little bit suspect to something that everyone did.

LYDEN: Mm-hmm. You mentioned the case of Carolyn Pittman. But there were also people who weren't looking to obtain more money. There were people who got some calls who only owed a few thousand dollars more on the mortgage or had a relatively small personal loan they wanted to pay off. Can you give us another example someone taken advantage of?

Mr. HUDSON: Most of these subprime loans were sold not bought. I mean the loan officers were basically telemarketers and they would call people over and over again, especially if you were an older African-American homeowner, you could expect to get repeated calls every week, and mailings asking you to take out these loans. And saying that, you know, we can help you. We can reduce your interest rate. We can reduce your bills. We can pay off your credit cards.

You know, the subprime model was in many ways perfected on inner city homeowners, often African-American and Latino. But then as the business grew, they took the lessons they had learned and used it to really market to everybody.

LYDEN: Marilyn, apart from the foreclosure wave we're seeing, what's been the consequences for those who built this house of cards?

GEEWAX: You know, it's interesting, as I mentioned before, this has really been going on for years now. And yet at this point, almost no one has really been prosecuted, certainly no one of note. You look back at what happened at Enron, you know, Jeff Skilling, one of the Enron executives got 24 years in prison. WorldCom's Bernie Ebbers got 25 years in prison. And so far we've had this nightmare, where literally trillions of dollars have been involved. And yet we haven't really seen those prosecutions.

And it's only now that, really, you're seeing this much broader interest in prosecution and pulling it together and seeing patterns of actual fraud and manipulation that went on that it seems like there's something bigger here. So we may see in coming years as the FBI and the state attorneys general get involved, that we will see much more in the way of criminal prosecutions. But that's yet to play out.

LYDEN: Michael Hudson, certainly the behavior you described, you know, it is criminal. I mean forging documents, fake appraisals, selling people one thing, stealing the paper from underneath the stack so that they didn't know that they'd signed for higher interest rates than what they thought they were getting. Why did people divulge so much to you about what they've done?

Mr. HUDSON: I think a lot of people felt bad about the things they'd done. It was interesting - I called a lot of former employees of many different mortgage companies and quite often they said, I wish someone had called me while this was going on. Or they expressed a sense of relief about finally being able to unburden themselves.

LYDEN: Marilyn, where does this all end? Home sales are up in September, which I think it must be good news.

GEEWAX: Well, it's better to be up than down, but the numbers are still terrible. I mean, compared with what we used to have in home sales, this is a disappointing number and even if you think about last year how bad we thought the economy was last year, sales in September, yes, they were up this year, but they're still way down from even last year.

So we've got a very bad market out there. And I think what we're starting to see is people are really being turned off from homeownership in general. There's so much concern about when we're going to really hit the bottom with prices. The prices still keep falling. So people are reluctant to buy for that reason. But, also, so many people did get burned by bad loans and had these terrible situations where they became caught up in foreclosures. So a lot of people are just saying, hey, I'll rent.

LYDEN: NPR senior business editor Marilyn Geewax and Michael W. Hudson. He's the author of "The Monster: How a Gang Predatory Lenders and Wall Street Bankers Fleeced America - and Spawned a Global Crisis." Thank you so much for coming in today, both of you.

Mr. HUDSON: Thanks, Jacki.

GEEWAX: You're welcome.

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