Mortgage Madness (Part 2)

Uploaded by alva0davi on 14.05.2009

This is a typical residential street in Santa Ana in the heart of Orange County, California.
You could call this the "epicenter" of our nation's financial meltdown where many homes like this are now in foreclosure.
It might be hard to believe but three years ago this house sold for $585,000 dollars,
all of it borrowed by a man who probably thought he could afford it.
But less than a year later, he defaulted, and now the house is up for sale at auction,
if anyone would even be interested in buying it.
But why would a lender issue a loan that a borrower might never pay back?
Some blame the problem on good idea gone bad.
Beginning in the 1990s, Congress made it easier to get a mortgage.
"Seventy percent of...
Americans who own their own homes today, in no small measure, do because of the work that's been done here."
The rules for lending were eased so more people could qualify for mortgages,
and with millions more now qualified, the lending business boomed.
"I'm with Countrywide, and I got them all approved."
The biggest player of all, Countrywide Financial, run by CEO Angelo Mazillo.
It was Countrywide that loaned Paula Taylor nearly $260,000 dollars to buy a condo, even though she was clearly unqualified.
So, what was the incentive?
Well, first, salesmen were paid commissions for every loan they wrote, and the lending companies collected fees.
But there was a much bigger incentive to make as many loans as possible,
a pot of gold overflowing with riches,
a scheme powered by some of the biggest financial institutions on Wall Street,
but it was all destined to fail.
"It blew up because it was based on a scam."
Few people know more about the financial crisis tha Harvard Law professor, Elizabeth Warren.
"Down at its heart, it was based on selling mortgages
to people who simply weren't going to be able to pay them off."
It was all based on a series of lies, beginning with a loan application.
On Paula Taylor's application, it it said she earned around $90,000 dollars a year, $7300 a month,
even though she says she told them she took home only $1600 a month.
She says she never noticed that inflated income until we pointed it out to her.
-- "So, you didn't put down that you made $7300 dollars a month?" -- "Oh, no.
Absolutely not."
"Well, if you didn't, who did?"
"It had to be them in order to finagle the numbers to say that I could afford this property."
Would a reputable lender do such a thing, deliberately lie?
"Throughout the industry, they were called the 'Liar Loans.'"
Karush Paarto once ran Countrywide's operations in Alaska. He's speaking out for the first time.
-- "Liar Loans" -- "That is correct.
Officially, they were called "Stated Income Loans."
"There was no independent verification of salary, savings--" "Nope."
"--investments," "Nope."
--"And this was a official procedure." --"Absolutely."
He says they even joked about it.
"If you have a pulse, we give you a loan. If you fog a mirror, (we) give you a loan."
He says if borrowers didn't lie, sometimes loan-officers did it for them.
Federal authorities caught Paarto and he spent a year and a half in prison for processing Liar Loans on behalf of a real estate speculator.
When Countrywide found out, it fired him and others in the Alaska office.
But Paarto insists the practice of faking loan applications was rampant, and everyone in the business knew it.
"So, you're saying top company officials knew borrowers were submitting false applications?"
"It's impossible they didn't know."
Countrywide executives portrayed Paarto as a rogue who violated company standards,
but listen to Bob Feinberg, who worked at Countrywide for twelve years.
-- "Rogue?" -- " (Do) you buy that?"
"No, I don't buy the 'rogue.' I buy, I think it was infested."
Feinberg says that when he started, Countrywide was ethical and "by the book."
But then, things just went haywire;
pushing loans borrowers couldn't afford with interest rates that could adjust, and go way up.
--"What's wrong with that marketing?" --"Because you're going to put them into a loan that's guaranteed to fail."
In Michigan, Linda Johnson, a retired school-principal, lived in this house for twenty six years.
Then, when her daughter got into an Ivy League college,
She decided to do what millions of home-owners were doing:
Refinance, taking out a new loan for more money, paying off the old loan,
and using the extra cash to pay tuition.
"What kind of a mortgage did you think you were getting?"
"I thought I was getting a fixed-mortgage."
But the interest rate wasn't fixed. It was adjustable.
Like many borrowers, she acknowledges she didn't go through the loan papers in detail.
So, she was shocked when her mortgage later jumped to nearly 12%.
To keep up with her loan payments, she ended up borrowing money from her pension-fund.
--"I made the payments on time." --"At what cost to your retirement plan?"
"I've taken out everything I can take without a severe penalty. And so I..."
--"And how much longer can you hang on?" --"I can't. I'm tapped. I'm done."
Another home-owner drowning in debt,
even though she thought her lender had her best interests at heart.
"Let's be real clear
about this mortgage crisis. This was not about getting people to own homes."
Elizabeth Warren says mortgage companies were more interested in profits,
and selling as many loans as possible,
especially risky loans to risky borrowers. Why?
Because the riskier the loan, the more a borrower had to pay in interest.
So, sales-reps were paid bigger commissions for bringing in those riskier loans.
"Mortgage brokers got paid a higher premium for selling every customer a worse product?
They actually got a sheet of paper, every morning, that said in effect,
'If you've got somebody who's got this credit-score, and this much down-payment, and wants to borrow this much,
if you sell 'em something clean, we'll pay you $500 dollars.
If you sell 'em something a little bit dirty, we'll pay a $1000 dollars.
If he sells a REALLY DIRTY, we'll pay you $4000 dollars.'
That's how mortgages were being sold in America."
From 2001 through 2007, more than a 105 million mortgages were sold, totalling more than seventeen trillion dollars.
With so much mortgage money available, sellers could practically name their price,
so, home-values kept going up.
That means the mortgages also got bigger, and risky or not, lenders were happy
because the higher dollar value on a house, the bigger fees they collected.
Which brings us to another lie: The house appraisal.
"The appraiser would say, 'What value are you looking for?'
'Well, we want this value. We want it to come in at 1.3 (million).'
'Oh, okay.' And they'd go out, do their appraisal and
it would come in at 1.3."
In that kind of environment, Karush Paarto says Countrywide made one bad loan after another.
"There are some times we would say, 'If it was my money, I would not lend it.''
Take the loan made to Paula Taylor.
"Does she seem like a candidate to buy a condominium valued at 260-some thousand dollars?"
"There've got to be a -- thousands, thousands of loans just like that."
"More than thousands and thousands. Hundreds of thousands."
"How do you relate what when on at Countrywide
to the financial crisis the United States of America is in today?"
"It's the match that lit the fuse.
Me and my peers knew this would happen. Not to this extent."
"At the end of the day, is this greed, is it arrogance, is it corruption?"
"Greed. It's always greed."