Lots of people have asked why the press didn’t tell us loudly enough that the subprime train was a-comin’. But if you read the work of Michael Hudson, you’d have had a good idea of what was in store.
Hudson, with colleague E. Scott Reckard, wrote what Audit chief Dean Starkman has called “two of the most revealing stories on the culture that overtook the lending industry” in February and March of 2005 on the criminal culture at now-disgraced Ameriquest.
Here’s a sample:
“It was like a boiler room,” said Bomchill, 37. “You produce, you make a lot of money. Or you move on. There’s no real compassion or understanding of the position they’re putting their customers in.”
Indeed, Bomchill – who said he left Ameriquest because he didn’t like the way the company treated its employees and customers, and now works as a mortgage broker – contends that the drive to close deals and grab six-figure salaries led many Ameriquest employees astray: They forged documents, hyped customers’ creditworthiness and “juiced” mortgages with hidden rates and fees.
Such claims are not unusual against sub-prime lenders, which are a frequent target of consumer groups.
But Hudson’s stories on dirty home-lending practices go even further back. Here’s one from 1992 in The Washington Monthly on predatory home-equity lenders.
And he wrote and edited a book in 1996 called “Merchants of Misery: How Corporate America Profits From Poverty”, which ripped subprime lending and other shady credit practices.
Hudson has been a staff reporter at The Wall Street Journal, where he wrote a great piece looking at Wall Street’s role in creating the subprime mess (and once co-wrote a story—most of which ended up on the cutting-room floor—with me on coming problems in commercial mortgages) and The Roanoke Times and written for many other major publications, including The New York Times.
Hudson is now a senior investigator for the Center for Responsible Lending and is writing a book on the rise and fall of the subprime market.
The Audit talked to him recently.
The Audit: How did you get on this? These stories go back a couple decades. What did you see that others weren’t seeing?
Mike Hudson: I was covering the poverty beat at a good mid-sized daily newspaper in Virginia, The Roanoke Times. A local legal-aid attorney took me aside and said it’s important to write about social-services programs and difficulties people have getting jobs, but one way to look at the problem of poverty is to look at how people try to better themselves. They buy a house so they can get some more stability and equity. Or they buy a car so they can get some mobility to get to a better job or get to school. Or they go back to school so they can get a better job.
That started me thinking about these kinds of issues. In ‘92 I was lucky enough to get an Alicia Patterson Journalism Fellowship, which gave me a year’s leave of absence from my paper to report and write on businesses that market to low-income and minority consumers.
TA: How key was the fellowship in allowing you to really get a grasp on this stuff?
MH: It really gave me time to talk to experts. I went all over the country. I walked around Techwood Homes (the first public-housing project) in Atlanta; went door to door talking to people. I hung out in front of check-cashing outlets, currency exchanges and interviewed people. I read lots of lawsuits. I was able to do this in-depth and really get a sense of the big picture. I eventually wrote a series of stories for my newspaper. I wrote stuff for The Nation and Mother Jones and The Washington Monthly; just tried to write as much as I could.
I wrote about the pawn shops and the check-cashing outlets and the trade schools. But eventually I started to narrow my focus and really focus in on predatory (mortgage) lending. All these other things are costly and can be hurtful to consumers but ultimately the worst way people can get taken advantage of and the deepest people can get in a hole is through a bad home loan.
One thing that a former assistant attorney general in the Midwest told me, he said “This was a catastrophe before it was a crisis”. People on the ground, actual borrowers, real people, were being hurt badly by these loans for many years. In the late 90’s, in the early 2000’s, people were losing their homes to foreclosure, but because of the run-up in real estate values a lot of this was hidden. You could get a bad loan and if the borrower refinanced in eighteen months, it looked as if you’d made a good loan. People continued to get new loans and try to stave off the inevitable. As they did this, they were having to pay more and more fees and pre-payment penalties and sometimes late fees. As long as property values were going up they could keep doing this, but eventually folks would collapse because the monthly payments would become just too big.
So the process for people defaulting and ending up in foreclosure would take eighteen months, two years, three years, five years even before people would fall apart. By having that delay and by the way they could play with the numbers because they could keep refinancing people and taking loans off their books, it didn’t look as bad. People were being hurt, people were suffering, foreclosures were high. But when property values started going down you ended up with a situation where people started defaulting very quickly. There was no way to get out of it and hide it. People could no longer refinance.
TA: How has the press done in its job over the last decade or so—you’d know the timeframe better than me—since the gears that led to this crisis started turning? How has the press done overall in connecting the dots and showing the whole picture?
MH: One of the key questions is the timeframe. Because there have been columns and essays about how the press has done covering the crisis and they tend to talk about things that were done in 2007 and 2008. Which is important—it’s an important function of the press to react to a crisis after it’s happened or while in the middle of it—but the problem is that the causes go back many years. Writing about bad mortgages in 2007, it was too late to stop the crisis.
We really needed more in-depth reporting and more exhaustive reporting back in the mid-to-late 90’s and early 2000’s through 2003-2004. That’s when the run-up was really happening, and that’s when things could have happened to have stopped or at least softened the blow of what was to come.
I think there was a lot of great reporting. You can even go back to the early 90’s, the Boston Globe did story after story, old-fashioned muckraking pieces, about… Fleet Finance, which was a subprime lender making a lot of questionable, abusive loans in Massachusetts and Georgia and elsewhere.
“Primetime” did a pretty hard hitting piece on Ford Motor Company and their subprime subsidiary which was called The Associates Financial Services. I helped a bit with that. To some degree the impetus for it was some reporting I had done on the Associates in the mid-90s.
TV news magazines I think did a pretty good job on these kinds of things in the 90’s before they decided that the only—other than 60 Minutes—the only stories worth doing are murder mysteries. The New York Times and “20/20” did a good piece in 2000 about the connection between Lehman Brothers and a small subprime lender that had lots of lawsuits.
There were a lot of good individual stories, but the problem was that they often weren’t followed up on. Sometimes they were followed up by the news organizations that did them, but you just can’t have that much impact, even if you’re The New York Times or the Washington Post if it’s like a one-shot story and you’re the only one doing it. Other people have to jump on and look at the story, too, and look at other angles.
For example, when Scott Reckard and I did the reporting for the LA Times on Ameriquest, which was the largest subprime lender, there wasn’t a lot of followup… from other publications or to look at other subprime lenders to say is this an isolated case, is this a single company gone bad or is the market as a whole?
TA: So those were dots that somebody should have been able to connect?
MH: Had you done that you would’ve seen that essentially if you went back ten or twelve years, every single company that had risen to the number-one slot, in terms of subprime-mortgage lending volume, had a big blowup where they had to go out of business or had to pay huge settlements for abusive lending. Household, Ameriquest, The Associates, Citi Financial. Those were the ones who were the dominant players in the late 90s/early 2000’s, and they all got in trouble.
Ultimately, you didn’t need access to the CEOs or the CFOs to find out about what was happening in the subprime market. Having access to them might have actually hurt the search. They either don’t know or have an incentive not to tell what’s going on. The story was out there to be done. Talk to ex-employees, look at borrower lawsuits. There is a lot of information about what kinds of loans are put into these securities pools. That’s disclosed in SEC filings. Documentation was there but the problem was you’re not going find it looking around at a high level. You have to look at a mid-level or lower level especially. The way Scott Reckard and I found that Ameriquest story was talking to loan officers.
TA: Newspapers and television are geared toward middle class and upper-middle-class readers, so was subprime just not on their radar?
MH: It’s true. I think part of the problem is that the coverage of business is basically aimed at covering issues that are important to investors. It can be small investors, average folks who are investing in bond funds or 401ks, but it’s geared toward the interest of investors and often not to the interests of consumers—or at least investors trump consumers when you’re trying to decide how to do a story or where to put resources as a news organization.
TA: The problem here is that you can’t do stories about investing in a vaccum without a—I hate that word—but a “holistic” view of the market and the economy which includes the people who are being lent to and are buying the products, right?
MH: What’s interesting with banking regulators, of course, their number-one priority is supposed to be safety and soundness. But the profitability of the company seems to be (the regulators’) number-one priority as opposed to, say, how you treat your customers or whether your customers are getting a good deal.
These companies were making a lot of money making these dicey loans. In the short term that seems to be a good thing for safety and soundness, but in the long run it actually is not. The boomerang comes back around and actually destroyed lots and lots of banks around the country.
Part of the problem both with regulators and the media was this focus on the short term rather than the long term, something Alex Berenson wrote about in ”The Number”. To the media, it’s quantifiable, it comes every three months, and so it becomes newsworthy. There’s this drumbeat of news—analysts say they expect the number to be this or that and it becomes a nice little vehicle for getting news out on a daily basis.
TA: We were all aware that the Bush Administration had rolled back regulation, and Clinton, too, though maybe not as much. But how does the press cover regulation in general?
MH: Often new regulations or tougher laws are treated as threats to profitability, as threats to business—as an attack on business rather than as an attempt to rein in bad practices and actually serve as guiding principle that can help businesses stay out of trouble and stay profitable in the long run and not blow up, as we’ve seen.
TA: That brings me to the question of the responsibility issue. Who’s responsible? The people who took the loans or the people who gave them NINJA loans or liar loans? There’s a back-and-forth going on, mainly between left and right, on who ultimately has responsibility for this. An important way to answer this question is just how much fraud and how much misleading there was by brokers. A lot of people don’t believe this stuff was going on. What do you say to the people who just say “buyer beware”?
MH: Buyers should beware, but these are extremely complicated transactions. Lots of documentation. A lot of these loans—very experienced consumer attorneys who have been dealing with these issues for years, it’ll take them hours to read through the documentation and really figure out what it all means. You have to understand pre-payment penalties, the London Interbank Offered Rate. These things are really complicated. The folks who understand these things much better are the loan officers, and the brokers, and the lenders who are doing these loans every day. They’re doing dozens of loans a month, thousands of loans a month.
The borrowers, some of whom had only done one or two loans in their lifetime or maybe this was actually the first mortgage they’d ever done, they didn’t understand these things to a large degree, and you had mortgage professionals who were being trained and pushed and incentivized to use bait-and-switch salesmanship, to use really fancy tap-dancing on the loan documents to fool people into not understanding what they were signing.
Again and again and again as I talk to people inside the industry and ask people who were underwriters, “Do you think these borrowers really understood? Do you think they knew their incomes were being inflated?” And most people will say “No, they didn’t. I would actually call a borrower to double-check something and they’d say ‘wait a minute. I never told them I made that much money.’”
Folks who have investigated these things, when they get the actual loan files from the lenders, often the initial loan application will have a correct or close to correct income for the borrower and often the borrower’s W2’s and tax returns will be there, because the borrower is thinking this is the way you do things; you’ve got to document your income. It didn’t start out as a no-doc loan. Then the mortgage professional says they’re not going to be able to afford this loan, so we’ll just do it as a no-doc loan, as stated income. They don’t necessarily tell the borrower that. The only chance the borrower has to know that is when they’re signing dozens of pages and there may be a page about the stated income. But who reads all the documentation? I’m sure there were some (borrowers) who knew what was going on, but only with the help and encouragement of the mortgage professional who said “Oh, don’t worry about it”.
The vast majority of these subprime loans were not to purchase homes. There was a great study that CRL did back in March of ‘07: “Subprime Lending: A Net Drain on Homeownership”.
Between 1998 and 2006, more than 60 percent of subprime loans were refinances. About 30 percent were used for home purchases. Less than one in ten, only 9 percent, were first-time home buyers. This idea that subprime loans were basically used by people who would never have a chance to own a house is a bit misleading. A significant percentage of people who got subprime loans could have qualified for prime loans.
The other leg of the falsification of mortgage documentation were inflated appraisals. This is something that borrowers had no control over. That was something that the brokers and the lenders were doing. The pressure on appraisers was incredible.
TA: That seems to be an untold story almost.
MH: Not much on inflated values.
Look at the lawsuit that New York Attorney General Andrew Cuomo has filed. One of the biggest appraisal companies, made $50 or $60 million in fees by caving into Washington Mutual.
I want to make sure I’m clear about this: There was some really good reporting. People like Bob Hagerty at The Wall Street Journal, and Diana Henriques at The New York Times over the years have done really solid muckraking reporting. But the problem was that the rest of the press didn’t jump on it. It never was raised to a level of any sort of real importance in the debate over what’s going on in our economy.
TA: Why hasn’t the press done better at following up on significant business stories?
MH: I think one of the problems with Ameriquest was it was not publicly traded. There’s less of a shareholder/investor kind of angle to that.
But it’s also the idea that there seems to be more of an appetite and more of an emphasis on investigating government or government-connected agencies. It doesn’t mean that there isn’t investigative reporting done on private companies, but there seems to be a higher bar.
I don’t know if you saw the recent article by Chris Roush in (the American Journalism Review) about how he thinks the press did an excellent job on these types of issues. It focuses on the great reporting that was done on Fannie and Freddie. There wasgreat reporting, but that doesn’t necessarily mean it was reporting that warned us about the coming mortgage meltdown or warned us about the true cause of the coming mortgage meltdown which was the alternative mortgage lending by private lenders bankrolled by Wall Street—the subprime lenders and the Alt-A lenders—who were pushing these risky products.
The Orange Country Register wrote in November that “Fannie and Freddie… were bit players in this market. Together they bought about 3 percent of all subprime loans issued from 2004 through 2007, most of that in 2007 alone.”
So Fannie bought a very negligible amount and most of it after the cake was already baked. At best Fannie and Freddie slightly exacerbated the problem, but certainly never drove the problem.
Fannie and Freddie in the end were sort of forced by the market to go along, but they were not driving it. And I think one of reasons why there was a lot of good reporting done on Fannie and Freddie is that they were sort of quasi-governmental institutions.
TA: What should the press do now? Has there been enough emphasis on the fact that Wall Street ultimately drove this, which you wrote about in the Lehman leder last summer?
MH: All the ink spilled on Fannie and Freddie and the Community Reinvestment Act—things that had little to no impact on the crisis, and then balance that on what’s been written on Wall Street’s role and it doesn’t look pretty. I think there does need to be more attention to that. To understand where do we go from here and what happened. There’s a battle going on right now to define what really happened. And there’s certain people pushing this idea that it was the government that caused this, the idea that it was the Community Reinvestment Act. If you read that story, written by Ronald Campbell in The Orange County Register, he found that nearly $3 out of every $4 made came from lenders that were exempt from the Community Reinvestment Act.
So we’re in a battle now to define what happened. There’s a lot of rhetoric being thrown about and a lot of people talking in ideological terms and trying to shift blame, but really what needs to be done is more reporting, to dig deep—and connecting the dots. The real numbers of what kinds of loans were made and who made them and how they were bankrolled and how they were funded and what’s the best way to prevent it from happening again.
One thing I think it’s important to remember is the predatory lenders have been with us for a long time in one form or another. Over the years they’ve morphed in response to investigations and governmentt reforms and new regulations, but they always find a way to morph into a new form.
Regulators and the media and policymakers need to be forward-thinking; they can’t just be fighting the last battle. What’s the next scam?Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.