The title of Michael Hudson’s latest, most ambitious dissection yet of the subprime phenomenon might ring overwrought, even hyperbolic. But The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis is not an epithet. “The Monster” is the name First Alliance Mortgage Co. gave to step No. 8 of its sales “track.” It is a mathematical sleight of hand every bit as disingenuous as “trickle down” economics or the so-called “fair tax,” but veiled by a mix of emotional razzle-dazzle and false hope.
“The Monster” was an attack on the concept of annual percentage rate, the disclosure of which regulators had mandated in order to stop older style scammers. Here’s how it worked: A loan officer would point out that over any 30-year loan, the borrower pays back much more money than he originally borrowed.
“Next came a series of leading questions, all designed to prompt the borrower to ‘realize’ for themselves that time was their enemy, not the interest or fees,” he continues. After that pitch comes a hand-drawn chart comparing the loans of example recipients, Smith vs. Jones. Both borrowed the same amount and paid the same fees and interest rate, but Smith pays it off in 15 years instead of 30, shelling out fewer total dollars than Jones. “But strangely, the loan officer gently points out, Smith’s annual percentage rate was higher.”
To a financially literate person, the reason for this is obvious – the up-front fees and points were spread over a shorter time period, which drives the annual cost of credit higher. Instead of explaining or admitting that situation, the loan officer “would prod borrowers into saying that the interest rate and fees really didn’t matter, that what mattered was for the borrower to make extra payments” to pay the loan off early.
Typically, every other element of the loan package was designed to prevent that.
“The Monster,” and the mindset it engenders, permeated mortgage lending in the 2000s. Philosophically, it is also at the core of the current economic crisis: a set of practices and procedures that, when spelled out in the light of reason, some might consider fraud; others – Karl Rove and former Federal Reserve Chairman Alan Greenspan spring to mind – might hail them as excellent salesmanship.
Regulators struggled to prosecute fraud-fueled subprime lenders, settling for fines without admission of wrongdoing. Even supposed citizen watchdog groups such as ACORN spoke up for some of the worst actors – after they’d accepted money from them.
So The Monster, which tells the history of Ameriquest founder Roland Arnall and the constellation of Southern California-based predatory lenders he spawned, is the essential book for anyone who wants to know what really happened. As engagingly written as Michael Lewis’ The Big Short (which chronicles the struggles the winners endured during the last bubble); as caustic and trenchant in its analysis of the dotty economic theories that underpin our bubble economy as Yves Smith’s ECONned; and at least as cogent of the big-picture power politics of Simon Johnson’s 13 Bankers, The Monster also does what those books don’t: It reveals the inner lives of both the victims and the perpetrators of predatory lending. This desperation on both sides of the closing table is Ronald Reagan’s real legacy.
Consider Stephen Kuhn, 21 years old and working as a shoe salesman in Kansas City, Mo., when Ameriquest called him with a job offer. The company had a sales team devoted to recruiting new mortgage brokers, and it gave him a sales pitch and asked how much he was currently earning. The answer was about $23,000. The branch manager making the pitch scoffed. He stated he made that every month. However, he did so only as long as the company booked more loans, by any means necessary.
For two decades the industry’s profits came from millions of people like Lillie Mae Starr, a 62-year-old grandmother in Georgia who tried to borrow $5,000 to replace her home’s drafty windows. With added fees, her loan came to $9,200. Her interest rate was 23 percent. Falling behind on payments and under threat of foreclosure from Fleet Bank, she tried to refinance to escape the mortgage company. After a couple of rounds her loan balance stood at $63,000, and Fleet owned that, too.
In the early ’90s Boston-based Fleet briefly became the nation’s corporate whipping boy for backing predatory loans. The bank disappeared in the mid-’90s merger frenzy, but its practices only spread and sharpened. Bank industry lobbyists beat back state regulation of predatory loans, claiming regulations would deny needed credit to poor borrowers. Lawmakers, greased by the lobbyists and, often, ideologically predisposed to believe them, continued the deregulation throughout the 1990s and 2000s, paving the way for a financial catastrophe unlike any seen in four generations.
Today, Republicans and Tea Party activists blame the government-sponsored Fannie Mae and Freddie Mac – and incredibly, the Community Reinvestment Act – for the financial carnage. The self-styled conservatives have threatened to dismantle even the modest banking law reforms that were passed last year. President Obama says he’ll “work with” these folks to reach common ground. While the prospect for serious regulation of the financial sector dims, the people who inked the toxic loans have flipped the signs affixed to their boiler-room doors and stapled them to lamp posts in nearly every community that’s not patrolled by private security guards. Whereas they used to say mortgages and loans, now they say mortgage modification and credit repair.
And the beat goes on.
A version of this story first appeared in Baltimore’s City Paper.
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