A Fighting Chance

That’s the real story behind the meltdown: the mortgage market sank, one Flora at a time. Some homeowners made bad decisions or tried to game the system, but many others got trapped by lousy mortgages sold to them by sophisticated financial institutions that should have known better.

By the early 2000s, the mortgage companies could see how much money the credit card lenders were racking up with deceptively low “teaser” rates, and a lot of them wanted to get their turn at the trough. And boy, did they get it. With interest rates effectively deregulated, there was no longer any limit on what these banks could charge, so the subprime lending spree was born.

New “mortgage products” popped up like weeds. Families were offered loan agreements that used unfamiliar terms like “balloon payments” and “option ARMs” and “prepayment penalties.” A lot of people didn’t look too closely at the deals—and like Flora, many relied on the word of a salesman who gave a slick description of the arrangements. As the mortgages got more complicated, lenders found plenty of new opportunities to slip in an extra trick here or a little trap there.

Many lenders made a mad dash for quick profits, abandoning their time-honored practice of carefully investigating job histories and pay stubs before approving a mortgage. Down payments shrank. Penalties and fees shot through the roof. Mortgage lending became so profitable that salesmen went door-to-door, often targeting African American and Latino neighborhoods for their highest-cost, most deceptive products. Other lenders pursued seniors like Flora.

Sometimes they pitched a lower monthly payment, and sometimes they pitched immediate cash. Millions of families had already run up tens of thousands of dollars in credit card debt, and these loans sounded like a lifeline. A lot of TV pundits were telling people that they were fools to pay the high interest rates associated with credit cards. Even Federal Reserve chairman Alan Greenspan urged Americans to “tap” their home equity. The math seemed compelling: Why pay 19 percent on your debt to a credit card company if you could pay 3 percent on a subprime mortgage? Of course, 3 percent was just the low introductory rate. And those glossy ads never showed how your rates might skyrocket over time, as the interest rate adjusted or if you missed a payment or two. And the ads never, ever showed pretty homes with red FORECLOSURE signs out front.

Fueled by all that new mortgage money, home prices caught fire. As the prices shot up, speculators jumped into the game. Everyone seemed to have a story about someone they knew who was getting rich by flipping houses. And as long as home prices kept rising, it was easy to overlook the danger signs. After all, anyone who couldn’t pay the mortgage could always sell their house for a profit—or they could as long as the happy music kept playing.

And then the music stopped. When the market finally collapsed, millions of people were caught in a trap. They couldn’t pay their mortgages, they couldn’t refinance, and they couldn’t sell their homes. By late 2008, one out of every five mortgage holders owed more than their homes were worth. The banks called in the loans, and the foreclosure notices piled up.

The housing crash ripped a huge hole right through the middle class. A home isn’t just a place to live; for most families, it’s their most valuable asset. It’s the savings plan, the retirement plan, and the inheritance all wrapped up in one big, bright package. Pay off the mortgage, and a family has a comfortable life raft, come what may. But if the mortgage is “underwater” and a family owes more than their house is worth, that life raft is made of cement.

When the housing market sank, so did America’s middle class.





Oversight in the Dark

The week after Senator Reid called, I went down to Washington to meet some of the other panel members and start figuring out the business of oversight. We needed to get organized, and we needed to do it fast.

TARP had been passed with an odd mix of Democrats and Republicans, but the effort had been spearheaded by President Bush’s secretary of the treasury, Henry Paulson. When the COP panelists arrived in Washington for the first time, TARP had been law for only seven weeks, but already the Treasury had committed a whopping $172 billion. We were deeply concerned that a lot of money was flying out the door with little oversight in place, so we had asked for a brief meeting with Secretary Paulson and other Treasury officials.