Sixteen
Dayton after Dark
DAYTON, OHIO, 2008–2009
On a sunny and crisp autumn day, Jim McCarthy and I were on a driving tour of Dayton. Weeks earlier I had phoned McCarthy to talk about the impact of the poverty industry in one typical midwestern city, and McCarthy, an upbeat forty-three-year-old with bright blue eyes and a raucous Nathan Lane laugh, graciously offered to show me around. At that point I was new to Dayton, so he veered a few blocks out of his way to show me the preserved, pristine bicycle shop where the Wright Brothers built the first airplane to successfully take flight. He made sure I saw the broad lawns and handsome red brick buildings of the University of Dayton and, for a food break, he chose a revitalized neighborhood that would have felt familiar to anyone living in a regentrified section of Brooklyn, Chicago, or Oakland. McCarthy, who was born and raised in nearby Cincinnati, does his best to present his adopted hometown in the most favorable light, but block after block of boarded-up homes and a seemingly endless chain of strip malls dominated by the companies I had been writing about left my head whirling.
I had been forewarned. That morning I had pored over local maps with a woman in McCarthy’s office named Anita Schmaltz, plotting possible routes. This was in October 2008 and Ohioans had yet to vote on Issue 5, by which the future of payday lending would be decided. I had told Schmaltz I was looking for neighborhoods thick with payday lenders, check cashers, instant tax companies, and consumer finance shops. She shrugged. If that were my criteria, she said, I might as well spin a dial because it made no difference in what direction we headed.
Schmaltz’s finger traced the snakelike path of the Miami River, which bisects Dayton. Heading west meant passing through the city’s black neighborhoods and, just over the city line, entering Trotwood, whose population in recent years had shifted from nearly all white to majority black. The poverty industry, she said, was particularly well represented in this suburb named, appropriately enough, after a character from a Dickens novel. A single street in Trotwood was home to no less than six payday shops, along with a Rent-A-Center and a Jackson Hewitt. The prospect of including Trotwood on our tour caused Schmaltz to sigh. That’s where she and her husband owned a home.
Heading south would bring us to a set of first-ring suburbs that had fallen on hard times, starting with Kettering. Not long ago, Kettering was a nice middle-class community that many within Dayton aspired to. But that was before the metropolitan area experienced seven straight years of job losses, starting in 2001 and culminating with the June 2008 decision by General Motors to shut down the giant truck plant it operated in Moraine, directly to Kettering’s west. “There’s lots of payday in Kettering,” Schmaltz said—and also in Moraine and West Carrollton and several more first-ring suburbs she named. But it doesn’t stop there even as one proceeds farther south and begins the climb out of the Miami Valley. Allan Jones may have been the first payday lender to open a store in a newer, more prosperous-looking suburb called Miamisburg but he had hardly been the last. Eight competitors opened outlets in Miamisburg, along with Rent-A-Center and Aaron’s. Jackson Hewitt and Liberty Tax each had two stores in town.
We ended up sticking mainly to the eastern half of the city and a sampling of predominantly white suburban towns. In recent years, the Center for Responsible Lending has released a pair of studies claiming that there is a racial bias to the placement of payday stores. These reports enraged the likes of Billy Webster and Allan Jones and I can’t say I blame them. They are hardly the most progressive group you’ll ever meet. After the end of a long day with Allan Jones, I commented that Cleveland seemed a very white town. “That’s why I can leave my keys in the car with the door unlocked,” he answered. I started to muster a response but he interrupted me. “I’m just telling you the way it is,” he said. “We have just enough so that our football and basketball teams are good.” But the payday industry as a whole seems no more racist in its approach to business than a great white shark deciding between different shades of fish. A few years back, Policy Matters Ohio studied the geography of payday lending in Ohio. They thought they were going to show that lenders target black communities, but in fact the group found almost no correlation between race and store placement, researcher David Rothstein said. “The big surprise was in how payday had really taken off out in the suburbs and rural areas,” he said.
After conferring with Schmaltz, McCarthy plotted out a route and pointed his 2002 gray Ford Focus east. We visited a few of east Dayton’s more battered neighborhoods and then headed south to begin a loop around some of the city’s first-ring suburbs. When I noticed three or four boarded-up homes on a block in the first neighborhood we visited, McCarthy waved off my whistle. “This is nothing,” he warned. At the end of the 1990s, people in Dayton had been alarmed that the courts were seeing more than two thousand foreclosures a year in Montgomery County, which encompasses Dayton and some of the first-ring suburbs. But that number crossed four thousand in 2003 and then again in 2005. The city would be hit by another 5,200 foreclosures in 2008 and there were forecasts of five thousand more in 2009.
The various neighborhoods swim together. There’s not really a name to that first neighborhood—the East Third Street community is the best McCarthy can manage—but in a way it made no difference. Each white working-class neighborhood was more or less a carbon copy of the other, a passing montage of modest-sized homes broken up by corners crowded with representatives of the poverty industry. Census data showed that the people who lived in the second neighborhood we visited, Linden Heights, were generally better educated than people living in the first, but the real difference, at the street level at least, seemed to be the proportion of homes for sale and the particular names of the stores that had taken root there. Both had a Jackson Hewitt and a Cashland payday store but whereas the first neighborhood had two check-cashing outlets and a Rent-A-Center, Linden Avenue, the main drag through Linden Heights, was home to a Check ’n Go, a CheckSmart, as well as an Aaron’s and at least two instant tax shops.
Kettering was a lot like its city cousins except that the drive to or from a furniture rental store was a little leafier and more pleasant. Toby McKenzie opened the first payday store there in early 1997; Advance America and an outfit called Check Exchange opened stores the following year. Another four payday operators established a presence between 2003 and 2006, and Cash America, the pawn giant, opened a store in a Kettering strip mall. By the end of 2007, Ohio would rank first in the United States in foreclosure inventory and in Ohio (in short order, the state would be surpassed by Nevada, Arizona, and Florida) only Cuyahoga County (Cleveland) had a bigger foreclosure problem than Montgomery County (Dayton). Statistics like those helped to explain a fall in the average sales price of a home in Kettering from a peak of $160,000 to $100,000 in the first quarter of 2009. Not surprisingly, Kettering and Moraine and West Carrollton offered endless more views of neighborhoods studded with plywood and for-sale signs.
McCarthy took the scenic route along the river to head back north, but even a dramatic change in background offered only a partial respite from the gloom of our tour. He pointed to the vast empty space where for decades National Cash Register had operated a series of factory buildings. At that point, NCR, which did a robust $5.3 billion in business in 2008, still had its headquarters in Dayton but years ago it moved most of its manufacturing overseas—and then, in June 2009, the company abruptly announced it was moving its central offices to the Atlanta area. Other ghosts hover along the river, including a long list of tool-and-die makers that shut down years ago and a vast, six-story redbrick building now literally filled with junk, like loose mannequin arms and radio vacuum tubes collected by a company called Mendelson Liquidators. Farther north was an old GM radiator plant torn down to make room for something the city is optimistically calling “Tech Town.” At the end of 2008, though, it seemed little more than thirty empty acres of good intentions.
Back in the city, more familiar Poverty, Inc. names occupy strip malls and storefronts and even an abandoned Pizza Hut now serves as a Cashland payday outlet. Yet perhaps the most startling sight on this portion of the tour are the bloated carcasses left behind by big-box stores that have abandoned Dayton in recent years, including a Builders Square, a Sun Appliance, and a Walmart. The mammoth shell that Walmart left behind, surrounded by an ocean of asphalt, must have been particularly galling. Dayton city officials had put together an attractive package of tax breaks to draw Walmart to this corner of the city, McCarthy told me, but as soon as the deal’s term expired, the retail giant moved several miles north “in pursuit of another set of benefits from a different jurisdiction.”
We entered Santa Clara, a white neighborhood that the Dayton Daily News had recently featured in a series that took a closer look at the destructiveness of the subprime mortgage meltdown. Here Ken McCall, a reporter with the News, discovered a four-block stretch he dubbed the “ground zero” of the area’s foreclosure crisis. It’s here in Santa Clara where I learned why McCarthy had previously shrugged at the sight of a few boarded-up houses. On a single block in Santa Clara, fifteen of twenty-eight properties had been sold at auction in the previous thirty-nine months, and an average of ten families lost homes during that period on the other three blocks the News featured. This was once a solidly middle-class neighborhood seemingly built on bedrock. Now anyone can buy a 1,500-square-foot house there for $30,000—if they don’t mind the drug dealers who now brazenly sell their wares on a street corner.
McCarthy headed toward Wright-Patterson Air Force Base, a sprawling facility that employs some twenty-two thousand people, most of them young and modestly paid, many of them non-military. He wanted to make sure I saw Huber Heights, and not because this once model suburb built in the 1950s heralds itself as “America’s largest community of brick homes.” The concentration of name-brand Poverty, Inc. outposts in this one town, which McCarthy dubs Dayton’s only truly integrated neighborhood, is at once astonishing and overwhelming. A partial list includes Rent-A-Center, Jackson Hewitt, H&R Block, ACE Cash Express, Advance America, Check ’n Go, Check Into Cash, CheckSmart, QC Holdings, and Cashland. In all, the state has issued fourteen licenses to payday operators in Huber Heights. CitiFinancial has its offices a few blocks from the town border and it was at a Household Finance in Huber Heights where Tommy Myers said he got “took for a screwin’.”
McCarthy lives not far from here and can remember Huber Heights as a thriving community. But the nearby giant Delco factory shuttered its doors in 2007 and all those people he described as earning $75,000 or $80,000 with overtime could no longer make the payment on their $600-a-month gas guzzlers or the adjustable rate mortgages they could barely afford in flush times. “I hate to say it because it’s cliché, but it really was the perfect storm,” McCarthy said. “You had all this predatory lending going on at the same time all these people were living beyond their means and overconsuming.” When the job losses hit, he said, it all turned very ugly very quickly.
One perspective on how the poverty business has grown so vast in so short a period of time holds that corporate America has so thoroughly chewed up the nation’s once-solid middle class that the country’s poor and working poor were pretty much the last consumer segment left to exploit. Witness the credit card industry: The charge card is barely fifty years old but whereas the country was a collective $20 billion in debt to credit card companies in the mid-1970s, that figure would exceed $600 billion by the end of the 1990s. Looking for fresh fields to harvest and inspired by the profits posted by the pioneers of the subprime charge card, the big banks began peddling credit to those on the economy’s fringes.
Elizabeth Warren, a Harvard Law School professor who has written extensively about consumer debt, would learn firsthand about the financial value of the customer who is barely making ends meet. When she was talking with a group of senior executives from Citigroup about how the bank where they worked might lower its default rate by more accurately determining which customers could least afford to carry credit card debt, a man at the back of the room interrupted her. Cutting off our most marginal customers, he told her, is out of the question because it would mean giving up a large portion of the bank’s profits. Warren quotes a MasterCard executive who described for her the perfect credit card customer. It’s someone who has recently emerged from bankruptcy protection because it will be years before they are permitted under the law to file for bankruptcy again yet they also have what he described as a “taste for credit.” (At the end of 2008, Warren would be named chairwoman of the five-person oversight committee Congress created to oversee spending of the $700 billion TARP bailout money.)
The tax preparation business has followed a similar arc. For years those running H&R Block, which was founded in 1955 and went public in 1962, were happy to stick to the core business of preparing tax returns for the middle class. As long as there was still a long list of cities and towns to conquer, they could simply open more storefronts each year to reliably post the double-digit growth revenues that Wall Street expected. But by 1978, confronting a map of the country that was more or less filled in, Block tried moving into the temp agency business (their logic being that a corporation that earned virtually all of its revenues during a four-month period was already in the temporary employee business) and then in 1980 purchased CompuServe, at the time a computer time-share company. Block even tried getting into the legal services business in a short-lived partnership with Joel Hyatt. But it wasn’t until the second half of the 1980s that the company wowed Wall Street with the refund anticipation loan. Block’s long-stagnant stock price soared by 118 percent over the next four tax seasons.
The subprime mortgage market, however, followed the opposite trajectory. It proved so successful among the working poor that it was reinvented and repurposed for middle-class borrowers. These borrowers, because they had deep scars in their credit records, or because they were self-employed and could not produce the W-2s needed to verify their income, or simply because they wanted more house than their income could justify, were offered mortgages on less favorable terms than conventional borrowers. A problem once isolated on Dayton’s black west side spread to the white east side and first-ring suburbs and quickly climbed up the hills in search of people living in higher tax brackets. By 2007, every county in the Miami Valley experienced a triple-digit increase in foreclosure filings since 1995—except Warren County, an exurb to the south that saw a four-digit increase of more than 1,000 percent in foreclosure filings.
The cast of companies making these loans changed as well. Subprime pioneers like Household Finance didn’t drop out of the game but they weren’t the same powerhouses that reigned during the 1990s. Most of the big consumer finance companies, for instance, no longer sold credit insurance, and if they did, they no longer folded it into the principal of a loan and financed it at shocking rates. And while the middle class might be perfectly happy to use a subprime product to buy the house they coveted, they certainly weren’t visiting some make-believe banker in a box in a strip mall as Tommy Myers had done. The era that Kathleen Keest would call the “third wave” of subprime finance was dawning, and the early years of the new century would see the mortgage broker emerge as a central player in the home loan business, selling to a new crop of companies.
Any list of the most successful third-wave companies would have to include Ameriquest Mortgage, the lender that so aggressively fought Vincent Fort and Roy Barnes in Georgia and the outfit that the Wall Street Journal would single out when looking at the role lobbying money played in the subprime meltdown. Ameriquest’s founder was Roland Arnall, an Eastern European Jew born in 1939 to a family that survived the war by pretending to be Roman Catholic. In Los Angeles after the war, a young Arnall got his start in business selling flowers on the street and eventually had enough money to start buying real estate. He pounced when Congress eased the restrictions on savings and loans in the early 1980s and then jumped on the mortgage lending boom in the mid-1990s. In 1996, Arnall paid a $4 million fine to the U.S. Justice Department to settle a lawsuit accusing his company of exploiting minority borrowers and the elderly. He declared that he was a changed man and promised that Ameriquest would serve as a model for the industry. In 2006, after raising $12 million on behalf of George Bush and other Republican causes, the president named Arnall the American ambassador to the Netherlands. By that point he had a net worth of $3 billion. He owned a $30 million estate in Los Angeles and a $46 million ranch in Aspen but also proved a generous philanthropist, making large donations to local animal shelters and hospitals and serving as co-founder of the Simon Wiesenthal Center in Los Angeles.
Like Household and the other consumer finance companies that preceded them into the subprime field, Ameriquest and rivals like New Century, Option One, and Countrywide Financial did not have depositors like a traditional bank would. Instead these operations arranged what in the trade are called “warehouse lines”—outsized lines of credit for businesses needing access to tens of millions of dollars in ready cash that Ameriquest used to make home loans to individual borrowers. But unlike the consumer finance shops, Ameriquest and its ilk did not hold these loans but immediately sold them at a quick profit to big investment banks like Bear Stearns, Lehman Brothers, or Merrill Lynch. (Sometimes they sold them to middlemen who put together big pools of these loans on behalf of its Wall Street brethren.) Bear, Lehman, Merrill, or other big investment houses on Wall Street would in turn sell pieces of these repackaged mortgages to pension funds, state and municipal entities, and other clients who thought they were buying something safe and reliable, as the A ratings bestowed on them by the big rating agencies implied. No subprime mortgage lender proved more proficient at this game than Arnall. In 2004, Ameriquest made $55 billion in subprime loans, topping the league tables published by Inside B&C Lending. The company would again rank first in 2005 with $54 billion in subprime loans, $15 billion better than Countrywide Financial, its closest competitor, and two or three times the loan volume of Household or CitiFinancial.
“Associates, Household, CitiFinancial, and the Money Store proved to be very good at subprime lending,” Jim McCarthy said. “But Ameriquest became the experts at it.” Where the old-line companies focused primarily on refinancings and home equity lines of credit, Ameriquest included new financings in its offering.
The three hundred retail offices that Ameriquest maintained in thirty-eight states might have been better appointed than those of Household or CitiFinancial, but Ameriquest at its core seemed familiar to McCarthy and his fellow housing advocates. Early in 2005, three years before personalities on the cable news networks started talking about mortgage-backed securities and credit default swaps, the Los Angeles Times ran a story by E. Scott Reckard and Mike Hudson revealing the darker side of this huge lender in its backyard. Ameriquest, the paper reported, seemed little more than a collection of “boiler rooms” scattered across the country, each stuffed with loan agents cold calling borrowers and then burdening them with higher rates than promised and fees they never bothered to disclose in loan agreements. In a suburban Minneapolis office, an agent named Mark Bomchill told of colleagues so eager to cross into six-figure salary territory that they forged documents. They were spurred along, Bomchill said, by a “little Hitler” of a manager who hounded them to sell more loans—in between reminders of how easily they could be replaced. Other former sales people told much the same story. It didn’t matter to Ameriquest’s bottom line whether customers could afford the high-cost loans they were being sold, because they would be off the books long before a borrower defaulted. “Proud sponsor of the American dream” was the Ameriquest motto but Ameriquest paid $325 million in 2005 to settle actions against it taken by forty-nine states and the District of Columbia, suggesting that for many its financings proved to be nightmarish.
Ameriquest, of course, was hardly alone in its relentless, reckless pursuit of borrowers and profits. Massachusetts Attorney General Martha Coakley singled out Option One Mortgage in 2008 when she sued that company, alleging that it engaged in “unfair and deceptive conduct on a broad scale by selling extremely risky loan products that the companies knew or should have known were destined to fail to Massachusetts consumers.” The complaint also charged that Option One specifically targeted black and Latino borrowers in its marketing push and routinely charged them with higher points and fees than similarly situated whites. Agents for Option One, it seemed, were particularly fond of “no doc” (no documentation) and “low doc” loans and also so-called “2/28” adjustable rate mortgages, sometimes called “explodable ARMs.” Often borrowers could afford the monthly payments during the first two years because a teaser rate remained in effect but not once the interest reset at a higher rate. “Brokers and agents for Option One often promised borrowers they could simply refinance before the ARM adjustment,” the Massachusetts complaint read, “without disclosing that such refinancing was entirely dependent on continued home price appreciation and other factors.” Yet Option One did not even make the top three in customer complaints with the Federal Trade Commission. Ameriquest was the clear leader, with Full Spectrum Lending (Countrywide’s subprime subsidiary) in second and New Century in third place.
Which subprime lender ranked as the worst? I asked that question of a wide range of people, from the banking analysts I met at an FDIC event in Washington, D.C., to the wide array of consumer activists I encountered across the country. Ameriquest was the clear winner in my unscientific straw poll but Countrywide, a latecomer to the subprime sweepstakes, received more than a few votes, and many chose CitiFinancial (Jim McCarthy’s pick), New Century, and Option One. The CRL’s Mike Calhoun named Countrywide (“you wouldn’t believe some of the stuff they were pushing out the door,” he said). Kevin Byers, a CPA and financial consultant whom Kathleen Keest had commended to me as her “favorite forensic accountant” (“he’s the only person I know who reads SEC filings for fun,” Keest said), cast Countrywide as the “most aggressive” of all the aggressive lenders attacking the subprime market in the 2000s.
Countrywide CEO Angelo Mozilo, as tawny as a movie star, the George Hamilton of subprime mortgage lending, had initially resisted the temptations of the subprime market. But the profits were too alluring and once the company made the jump, Mozilo seemed determined to make his company number one. “Countrywide wanted to lead the market and so they adopted whatever product innovation was out there,” said Byers, who runs a consulting firm in Atlanta called Parkside Associates. They were happy to put people in a high-priced product nicknamed the NINJA loan (No Income, No Job, No Assets, also called a “liar’s loan” because it essentially invited a borrower to obtain a loan with virtually no documentation) and they paid what they needed to pay to convince brokers to steer borrowers to a higher-cost loan from Countrywide. In 2009, the Securities and Exchange Commission charged Mozilo with stock fraud, citing email messages in which Mozilo himself referred to some of his products as “toxic” and “poison.” Mozilo, who had received as much as $33 million in annual compensation and cashed in hundreds of millions in options, was also charged with insider trading.
There were other culprits, of course, starting with all those mortgage brokers willing to accept fees for steering clients into the 2/28 teaser loans they couldn’t possibly afford in year three. “The brokers were the drivers, as far as I’m concerned,” said Chuck Roedersheimer, a bankruptcy attorney I met in Dayton who specializes in cases involving home foreclosure. They worked on commissions, Roedersheimer said, that could reach 3 or 4 percent of the loan’s value if it included a generous yield spread premium—the bonuses a lender gave brokers who steered borrowers into higher priced, more profitable loans. Early on, Option One was among those lenders refusing to pay a yield spread premium, essentially a bribe for putting people into higher-priced loans. “But then brokers stopped sending them business,” the Center for Responsible Lending’s Mike Calhoun said. “So they turned around and endorsed yield spread premiums because that’s what they needed to do to compete.” (A study commissioned by the Wall Street Journal found that more than half of the borrowers taking out a subprime loan between 2000 and 2006 had a credit score high enough to qualify them for a conventional rate loan.) Mortgage broker might once have been considered an honorable profession, but by the start of the 2000s it seemed nothing more than a quick way to become rich. “Literally you saw people going from used car dealer to mortgage broker,” Jim McCarthy said.
Yet the system worked after a fashion—as long as home prices continued to rise at a brisk rate. The broker was happy to put a homeowner holding an adjustable rate mortgage about to reset into a new mortgage if a $300,000 house was now worth $350,000, as was the lender. Everyone earned another fee, and the ultimate stakeholders would even hold collateral that was appreciating in value. There would only be a problem if home prices fell. Without the ability to refinance, people would be trapped in adjustable rate mortgages they couldn’t really afford and as more families were forced into foreclosure, prices would fall further, widening the gap between the amount owed on a property and the price it would fetch at a sheriff’s sale. Only then would it seem as if everyone had been living in a perversely rosy world.
“Losses were remarkably low given the crazy lending they were doing,” Mike Calhoun said, “but that was because they were doing even crazier stuff, putting off foreclosures by refinancing people into even less sustainable loans.” The most maddening part, Calhoun said, was that the more lenders loosened their terms, the more it reinforced a perception that there was nothing wrong. Home ownership was on the rise, the stock market was soaring, and politicians on both sides of the aisle were happily accepting campaign contributions from these rich new benefactors. “It was a hard time to say this giant storm is building but it’s beyond the horizon,” Calhoun said.
In places like Ohio that weren’t experiencing the same boom in home prices as other parts of the country, consumer advocates started talking about another problem: appraisal inflation. For Beth Deutscher, an early member of the Predatory Lending Solutions Project that Jim McCarthy helped put together, the case that alerted her to the problem involved two sisters in their sixties, both legally blind and living on a fixed income. The sisters were in a house in such poor shape that the dining room sloped downhill, Deutscher said, and cracks were visible in the foundation. Yet somehow they owed a lender $100,000 after a broker sweet-talked them into signing papers they couldn’t read for a loan they couldn’t afford. Initially Deutscher, who by this time was running an organization she helped found called the Home Ownership Center of Greater Dayton, read the appraiser’s report and wondered if the crazy real estate inflation taking place in other locales had hit Dayton. The house to her seemed worth less than half that $100,000. But the case of the sisters taught her that as bad as waves one and two of the subprime mortgage fiasco had been, there were still new shocks to be had in wave three. Select appraisers, it seemed, were happy to enrich themselves by fabricating a report when a lender needed the justification for an outsized loan.
“With that case it started to become clear that lenders are not afraid to loan more than a house was worth,” Deutscher said. “It became all about maximizing the up-front profit and then moving on to the next loan, with no conscience about how that was going to play out.”
The big rating agencies would play similarly destructive roles as well—and not out of ignorance, Kevin Byers told me when I visited him in Atlanta. To make his point he grabbed a stack of reports he keeps handy in a desk drawer. One is from Moody’s and is dated May 2005. It explores what its analysts called the “payment shock risk” associated with the 2/28s as lenders continued to lower the teaser rates to make loans seem more affordable. “The resulting differences in potential payment increase,” the analysts note, will have a “meaningful” impact on the financial soundness of these loans. Another, written by two Standard & Poor’s analysts in April 2005, explores what the pair describe as the “continuing quest to help keep the loan origination flowing.” Lenders are resorting to any number of new products to keep loan volume up, they wrote, including mortgages that mean people will own less of their home over time rather than more and the repurposing of interest-only loans for the subprime market, a product that really only made sense for a rich client who can afford the balloon payment on the other end. “There is growing concern around the increased usage of these mortgages,” they wrote.
“It’s not like they didn’t know that all this was going on,” Byers said. “They just didn’t want to do anything about it because they had a vested interest.” The institutions putting together these packages loaded with toxic loans were the very ones paying the credit agencies to evaluate the creditworthiness of the loans, and so the agencies would liberally hand out top ratings while relegating their concerns to the occasional research report. “I think they saw their role as ending once they put the investor community on notice that there are structural issues that they need to watch out for,” Byers said. The attorney general of Ohio was among those suing the major credit rating agencies, claiming their stamping of a triple-A rating on high-risk and wobbly securities cost state retirement and pension funds more than $450 million in losses.
Alan Greenspan shares some of the blame—a lot of the blame, according to some. Congress had deputized the Federal Reserve to enforce a sense of fair play inside the subprime market but the Fed chair steadfastly maintained a hands-off approach even as subprime grew from 5 percent of the mortgage market in 2001 to a 29 percent share by 2006. Worse, Greenspan kept interest rates historically low through the first half of the decade—at 1 percent in 2003, the lowest rate in half a century. “I’m sitting there watching Greenspan continuing to lower interest rates,” Kathleen Keest said, “and I’m going, ‘I thought your job was to take the punch bowl away and you’re pouring more rum into it.’” Federal Reserve Governor Edward Gramlich would rebuke Greenspan for showing no interest in investigating the predatory behavior of the subprime lenders.
There were those who said Wall Street was primarily responsible. Their insatiable appetite for these loans—the New Yorker’s Connie Bruck called it Wall Street’s “addiction”—kept everyone motivated. But then one can also fault those wanting to buy small tranches of a mortgage-backed bond for keeping demand high. And to say “Wall Street” is to miss out on a broader range of culprits. In the mid-2000s, it seemed every major financial institution in the world had a hand in this dirty business. By 2006, Wells Fargo, through its Wells Fargo Home Mortgage unit, ranked as a top-ten subprime lender, as did Citigroup, which ranked fourth. Washington Mutual placed eleventh on that same list and Chase Home Financial, a division of JPMorgan Chase, seventeenth. HSBC, the London-based financial giant that had purchased Household Finance, was number one on the list in 2006 after its subsidiary, Household Finance, regained the top spot with $53 billion in subprime loans. A chastened Ameriquest, which paid a $325 million settlement earlier that year, fell to seventh.
And the big financial conglomerates were hardly the only major corporations to aggressively jump into the subprime mortgage business. The money H&R Block made offering refund anticipation loans had apparently given the tax preparation giant a taste for subprime profits because in 1997 it paid $190 million for Option One and in short order transformed it into a top-tier subprime lender. General Motors aggressively entered the subprime market through its GMAC unit, which bundled together nearly $26 billion in mortgage-backed securities in 2006, and General Electric owned WMC, a subprime lender that made $33 billion in mortgage loans in 2006, ranking it fifth on the Inside B&C Lending list.
Glen Pizzolorusso, a WMC sales manager, gave a sense of what life was like in the middle of the credit cyclone when he agreed to an interview in 2008 with the radio show This American Life. Pizzolorusso, in his mid-twenties, seemed to be living the life of a mini-celebrity. He bought $1,000 bottles of Cristal champagne at bottle clubs in Manhattan and rubbed shoulders with the likes of Christina Aguilera and Cuba Gooding, Jr. He bought a penthouse on Manhattan’s Upper East Side and a $1.5 million house in Connecticut and owned a Porsche and two Mercedes to get him back and forth. He was making between $75,000 and $100,000 per month and suspected something might be seriously wrong in his life when one month he was paid $25,000 and that wasn’t enough to cover his expenses. “I did what YOU do every day, try to be the best at my job,” he wrote on a blog he created to defend himself after his story appeared on the radio. He didn’t create the rules, he said, and the corporation he worked for had stayed within the law. His sole regret, he wrote, was that he had spent his money so foolishly.
The first overt sign of trouble came in February 2007, when HSBC announced that it was writing down its subprime mortgage holdings by more than $10 billion. The housing market had peaked in 2006 and began its inexorable decline, and in short order HSBC would not be the only large institution to announce a loss in the double-digit billions. By the time the banks were lining up for TARP handouts from the federal government in the fall of 2008, the U.S. stock markets had lost more than $8 trillion in value. Finally, the country woke up to the problem that Bill Brennan, Martin Eakes, Jim McCarthy, and others had been warning about for years.
In Dayton, it fell to people like McCarthy and Beth Deutscher and Deutscher’s old employer, Consumer Credit Counseling Services, to handle the fallout. The civil courts also absorbed much of the burden; by 2006, foreclosures represented 49 percent of the civil caseload in Montgomery County. Bankruptcy attorneys like Chuck Roedersheimer worked to sort out the mess.
Roedersheimer worked at Thompson & DeVeny, located a few miles from downtown on a street crowded with insurance agents, medical professionals, and fast-food purveyors. There a basic bankruptcy could be had for a couple of thousand dollars. Business in recent months had been very good at Thompson & DeVeny, Thompson told me prior to my arrival in December 2008, but that turned out to be a major understatement. I entered the waiting area in a low-slung bunkerlike building and found no seats. A loud-voiced receptionist called out people’s names as if we were all crowded in a bus terminal. The firm has three lawyers, Roedersheimer told me, and they were seeing as many as two hundred new people a month and taking on forty to fifty as clients. He figured he saw two or three clients a day but the other two lawyers (the firm has since added two young associates), well versed in the intricacies of bankruptcy law and unburdened by the complexities of the subprime loans that were his specialty, were seeing ten a day.
The phone rang constantly during the hour I spent with Roedersheimer. He took several calls, from a judge and from opposing counsel, but that only gave me more time to behold the veritable skyline of paper that dominated his office. Stacks of folders were piled high on his desk and there were more sitting on a credenza behind him. One reached so high I feared Roedersheimer would be lost in an avalanche if it fell. There were files stacked on the floor next to him and more piled behind me and on every chair in the room except his and mine. There were more mentions of Ameriquest in those stacks than any other lenders, Roedersheimer said, but Option One and CitiFinancial were also well represented. He seemed to hold American General Finance, AIG’s subprime mortgage division, with a special contempt but that might be because AIG played so hideous a role in the subprime mess through its sale of a subprime insurance product (the so-called “credit default swaps”) that didn’t come close to covering the losses when disaster hit.
Roedersheimer is a slight man with short gray hair and pouchy Fred Basset eyes. He walks with a slight slouch as if carrying his client’s collective burdens on his back. For twenty-six years he oversaw procurement contracts for the U.S. Defense Department, and though he had risen to assistant regional counsel, he left because he couldn’t take the commute anymore, 170 miles roundtrip to Columbus five days a week. In 2001 he took a job with the local legal aid office in Dayton, hoping to carve out a specialty in subprime mortgage loans, but the funding for that project lasted only a few years. Among those clients he took with him when he left legal aid was an elderly couple from Kettering (he had worked as a bricklayer; she had retired from the phone company) who had been talked into so many refinancings that they owed $126,000 on a house that was worth maybe $80,000. “One of the things you look for when you deal with predatory lending is can the person afford the loan when all is said and done,” Roedersheimer said. Because this couple couldn’t, he was able to get the woman (her husband had since passed away) some money from their mortgage broker and also another $5,000 from an appraiser who had worked on her mortgage application.
But such outcomes are depressingly rare, Roedersheimer said. “Unless there’s out-and-out fraud, if people signed the papers, there’s not much I can do for them,” he said. He gets people the bankruptcy that brought the client to the office and that’s about it. Sometimes, he said, he can’t believe the shamelessness of lenders, but often he can’t fathom how little people understand basic finances, his more middle-class clientele included. Clients took out home equity loans not appreciating that they were risking their home on their ability to pay. He shook his head over all those who used payday loans to try to forestall the inevitable, not recognizing that they were only digging a deeper hole for themselves. But if he’s learned anything in his five-plus years handling bankruptcies, it’s that people will use whatever they have at their disposal—a rich brother, a credit card, the corner pawnbroker—if it means holding on for one more month.
Before someone can complete bankruptcy proceedings, he or she must first attend a short financial education course taught by people like Ken Binzer, a retired military educator working for Dayton’s Consumer Credit Counseling Services. To Binzer, the requirement that people endure at least two hours of class time so they can better handle their finances is about the only good thing to come out of the otherwise pro-lender Bankruptcy Abuse Prevention and Consumer Protection Act that George W. Bush signed into law early in his second term. Even people who theoretically have nothing are vulnerable, he said, because of those who might be the ultimate financial vultures of the poverty business: those who view a declaration of personal bankruptcy as a profit opportunity. The worst, Binzer said, are the car dealerships that comb the legal records for the names of those who have recently filed.
Binzer asked his class how many had received an offer from an auto dealer since initiating bankruptcy proceedings. “Almost always one hundred percent of the hands go up,” he said. Often people emerge from a bankruptcy without a vehicle but a ready market of prospective customers needing transportation is only one reason the dealers are so eager for their business. There are solicitations from new car companies and solicitations from those selling used cars but invariably the come-ons are all the same. “They’ll offer them a loan at eighteen to twenty-two to twenty-five percent but make it sound affordable by giving a person eight years to pay back the loan,” he said. Interestingly, Binzer said, eight years is precisely the amount of time a person must wait before filing for another Chapter 7.
Late in the afternoon of my Dayton drive-along with Jim McCarthy, he asked if I would “indulge him” and visit a neighborhood not on our tour. I had asked him to show me the city’s white working-class neighborhood but he wanted me to see at least a small patch of the predominantly African-American west side. Later, Fesum Ogbazion, the CEO of Dayton’s Instant Tax Service, would tell me that if it weren’t for the instant-tax mills and the payday lenders, the check cashers, and the occasional pawnbroker, there would be no businesses operating in poor minority communities other than a few convenience stores and the ubiquitous hair and nail shops. His claim was an exaggeration but only a slight one. It was on the black side of town where all these low-rent credit shops had first taken root and it seemed every major payday chain had at least one outlet on the west side of the river, and most seemed to have two. Cashland operated no less than five payday stores in west Dayton. Even the Sunoco station we passed shortly after crossing the river sported a sign advertising its check-cashing services, allowing the proprietor to charge up to 3 percent of the face value of a check.
McCarthy drove slowly through a west side neighborhood called University Row (the streets have names like Harvard and Amherst). Many of the homes are magnificent, or at least they were not that long ago: wooden beauties with leaded glass and architectural touches like turrets and gables and wraparound porches. I had gasped earlier in the day when I saw three or four boarded-up houses clumped near one another and there were those few blocks in a row in Santa Clara where nearly half the homes had been foreclosed. Here, however, it seemed that half the homes on every block had been abandoned. Paint was peeling, exteriors were crumbling, multiple windows were broken, lawns were overgrown, and the occasional roof had buckled in. This is a place, McCarthy said, that not so long ago he would have described as a stable, solidly working-class community. No longer. “We’re seeing the sex trade here,” McCarthy said as he drove. “There’s drug stuff going on inside a lot of these boarded-up properties.”
And there are similar communities elsewhere in the country. One, South Ozone Park, a predominantly black neighborhood near New York’s Kennedy Airport, is populated by postal workers, bus drivers, teachers, and clerks. These people were solidly middle class and yet it was South Ozone Park and several other black enclaves in the southeast corner of Queens that the New York Daily News declared the “ground zero of New York’s subprime mess.” For decades the story of neighborhoods like these was their stability; houses weren’t sold so much as passed down from generation to generation. But that was before the mortgage brokers set up shop in the early 2000s. In South Ozone Park, the Neighborhood Housing Services of New York City, an organization that offers financial education and affordable lending products, started to see changes in South Ozone Park and several of the neighborhoods around it. Soon, Sarah Gerecke, the group’s CEO, told me, where less than 5 percent of the homes in South Ozone Park would change hands in a given year, that number rose to 20 percent. By 2008, she said, the turnover rate on some blocks was approaching 50 percent.
“When you look at communities like South Ozone Park,” Gerecke said, “you can’t help but think that abusive lending was often more racial than economic.” Gerecke’s claim has been substantiated by any number of studies, including a May 2006 report by the Center for Responsible Lending that demonstrated a significant racial bias in subprime mortgage lending even taking into account income and credit score.
In the car with McCarthy, looking at all those once-beautiful homes now serving as nothing more than well-dressed drug houses, I couldn’t help speculating about whether I was seeing a vision of the future. It was here, in communities like Dayton’s west side, where the subprime mortgage disaster that would engulf the country first reared itself. It’s here where the disaster has had the longest to play itself out—and it was clear as we wound up our tour that it’s far from over.