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.