Andy Pollock rode the last subprime mortgage wave to the top, then got out as the industry collapsed and took the U.S. economy with it. Today, he’s back in business.
Pollock was president and CEO of First Franklin, a subprime lender whose risky loans to vulnerable consumers hastened the downfall of Merrill Lynch after the Wall Street investment bank bought it in 2006 for $1.3 billion. He still was running First Franklin for Merrill in 2007 when he told Congress that the company had “a proven history as a responsible lender” employing “underwriting standards that assure the quality of the loans we originate.”
The next year, federal banking regulators said First Franklin was among the lenders with the highest foreclosure rates on subprime loans in hard-hit cities. Standard & Poor’s ranked some of its loans from 2006 and 2007 among the worst in the country. Lawsuits filed by AIG and others who bought the loans quoted former First Franklin underwriters as saying that the company was “fudging the numbers” and calling its loan review practices “basically criminal,” with bonuses for people who closed loans that violated its already-loose lending standards.
Merrill closed First Franklin in 2008, after the subprime market imploded and demand for risky loans dried up. For Pollock and his contemporaries, who have survived decades of boom and bust in the mortgage trade, the recent near-toppling of the global economy was a cyclical, temporary downturn in a business that finally is beginning to rebound.
Five years after the financial crisis crested with the bankruptcy of Lehman Bros. Holdings Inc., top executives from the biggest subprime lenders are back in the game. Many are developing new loans that target borrowers with low credit scores and small down payments, pushing the limits of tighter lending standards that have prevailed since the crisis.
Some experts fear they won’t know where to stop.
The Center for Public Integrity in 2009 identified the top 25 lenders by subprime loan production from 2005 to 2007. Today, senior executives from all 25 of those companies ‒ or companies they swallowed up before the crash ‒ are back in the mortgage business. Most of these newer “nonbank” lenders are making or collecting on loans that might be too risky to qualify for backing by the U.S. government. As the industry regains its footing, these specialty lenders represent a small but growing portion of the market.
The role of big subprime lenders in teeing up the financial crisis is well documented.
Lawsuits by federal regulators and shareholders have brought to the surface tales of predatory lending, abusive collection practices and document fraud. A commission charged by Congress to look at the roots of the crisis said lenders “made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities.”
Risky loans, a Senate investigation concluded, “were the fuel that ignited the financial crisis.”
As borrowers defaulted at increasing rates in 2006 and 2007, global financial markets tightened, then froze. The result was the worst economic crash since the Great Depression. Today, millions of Americans still face foreclosure. Yet few subprime executives have faced meaningful consequences.
“Old habits die hard, especially when there’s no incentive to do things differently,” says Rachel Steinmetz, a senior underwriter-turned-whistle-blower who worked at subprime lender GreenPoint Mortgage, later bought by Capital One, until June 2006. “The same shenanigans are going on again because the same people are controlling the industry,” says Steinmetz, who stays in contact with former colleagues.
To be sure, loans offered by these executives’ new companies face unprecedented scrutiny by regulators and investors. Many of the riskiest practices from the subprime era have been outlawed.
“We could never, ever go back to the kinds of products we were selling. They were disastrous,” says John Robbins, who founded three mortgage lenders ‒ two before the crisis and one in 2011, from which he recently stepped down. The new holy grail for some lenders, according to Robbins: a mortgage that complies with new rules yet “creates some opportunity to lower the bar a little bit and allow consumers the opportunity to buy homes (who) really deserve them.”
Robbins is one of several executives identified in the Center’s investigation who have gathered up their old teams and gotten back into the mortgage business. Others have tapped the same private investors who backed out-of-control lending in the previous decade.
The lenders vary in how willing they are to accept lower down payments, weaker credit scores or other factors that can make a loan more risky.
New Penn Financial allows interest-only payments on some loans and lets some borrowers take on payments totaling up to 58 percent of their pretax income. (The maximum for prime loans is 43 percent.) PennyMac’s nongovernment loans make up a tiny portion of its total lending and have virtually the same underwriting standards as prime mortgages, but the loans are bigger than government agencies would allow. And Rushmore Home Loans so far offers only mortgages that could likely get a government guarantee, though a company website says it “intends to expand and enhance current product offering.”
The newer loan offerings remain fairly safe, but companies gradually are becoming more flexible about what documentation they require and how big borrowers’ payments must be, says Guy Cecala, publisher of the trade magazine Inside Mortgage Finance. “You’re going to see a little more risk coming into the system,” Cecala says, as lenders permit smaller down payments and finance more investment properties.
Riding out the storm
After First Franklin closed in 2008, Pollock remained in his five-bedroom, $2.4 million home in ritzy Monte Sereno, Calif. He led a consulting firm that became a temporary haven for at least 15 former First Franklin employees.
By 2013, Pollock was co-CEO of Rushmore Loan Management Services, a company that traditionally collected payments on loans and is now originating loans. The company offers adjustable-rate mortgages and allows down payments as low as 5 percent. A company spokeswoman said that Rushmore’s loans meet government standards and that some government programs allow low down payments to encourage homeownership.
Pollock is among at least 14 founders or CEOs of top subprime lenders whose postcrisis employers want to serve consumers who might not be able to qualify for bank loans.
Also on the list is Amy Brandt, who at 31 became CEO of WMC Mortgage Corp., then owned by General Electric. Brandt‘s properties include a $2 million, 13,600-square-foot mansion – with a landscaped pool, waterfall and wood-paneled home theater – in a Dallas suburb that Forbes once ranked as America’s most affluent.
In July, she was named chief operating officer of Prospect Mortgage, backed by private equity firm Sterling Partners. The firm is run by a former executive of IndyMac and American Home Mortgage, and its chairman is a former CEO of the government-sponsored mortgage finance giant Fannie Mae. Prospect’s mortgage offerings include interest-only loans whose payments can increase sharply after a few years.
Jim Konrath, founder and former CEO of Accredited Home Lenders, which cratered so quickly when the housing bubble burst that a private equity firm that had agreed to buy it tried to back out of the deal, today is chairman of LendSure Financial Services, a company that advertises “serving customers along the credit continuum, and doing so in a way that is both profitable and fair.”
The company’s founders “successfully emerged from the latest industry downturn ‒ and navigated others before it,” LendSure tells visitors to its website.
In 2011, California regulators accused Konrath and LendSure of collecting illegal upfront fees from people seeking loan modifications and failing to maintain required records. Konrath paid $1,500 and was required to take a class and pass a professional responsibility exam. David Hertzel, a lawyer for the company, said Konrath was not “actively involved” in the decision and was penalized because the company was operating under his broker’s license.
With LendSure based in San Diego, Konrath has been able to keep his secluded 4,200-square-foot house in nearby Poway, as well as a ski chalet near Lake Tahoe.
And there’s Scott Van Dellen, former CEO of the homebuilder-lending division owned by IndyMac ‒ a California bank whose collapse was the nation’s costliest. Last December, a jury agreed that he and two other former executives should pay $169 million to federal regulators, finding that they negligently approved risky loans to homebuilders. (IndyMac’s insurers may pay some or all of the judgment, which is subject to a possible appeal.)
Van Dellen’s new company, Yale Street Mortgage, is in the same Pasadena ZIP code as IndyMac and provides loans to real estate investors who want to “buy, fix and flip” single-family homes and small apartment buildings.
Lender, yes; bank, no
Most of the bad loans that brought about the crash in 2008 were made by lenders that were not owned by banks. These companies cannot accept deposits ‒ their loans are funded by investors, including private equity firms, hedge funds and investment banks. In the run-up to the crash, big Wall Street investment banks binged on subprime lenders, spending billions to buy them up and resell their loans just as the market turned.
Lehman Bros., for example, bought BNC Mortgage in 2004 and financed subprime loans offered by other companies. Jim Harrington was a senior vice president with Lehman from 1999 to 2008 and now is a managing director for Resurgent Capital Services, which collects mortgage and other debts and specializes in “challenging loan portfolios.”
At Lehman, Harrington was charged with determining how much risk was posed by a lender’s legal compliance and lending decisions. He says he was not a “key decision-maker or a key source of setting credit policy” at Lehman, but more of “a spoke in the wheel.”
As the mortgage industry undergoes another wave of consolidation, nonbank lenders again are attractive targets for investors seeking to enter the mortgage business overnight. They also remain far less regulated than banks that take deposits. Banks tend to offer only the safest home loans ‒ those that qualify automatically for government backing.
New regulations have made lending standards so tight, industry officials argue, that many Americans who should qualify for home loans effectively are shut out of the market.
“The American consumer is underserved at this point,” says Robbins, the three-time mortgage CEO. “How do we serve the low- to moderate-income community as an industry when you have these kinds of daunting regulations?”
Many of the most problematic loan types from before the crisis have been banned, including “liar loans,” which didn’t require borrowers to prove their income, and balloon loans, which offer low payments for a number of years, then sock borrowers with a giant, one-time payoff at the end.
Nonbank lenders now face on-site examinations by the Consumer Financial Protection Bureau and can be punished for making deceptive loans or loans that borrowers clearly cannot repay. The bureau found recently that many lenders lack basic systems to ensure that they comply with the law.
Still, lenders are finding other ways to offer loans to people who can make only a small down payment or who have lower credit scores than traditional banks will accept. Such loans, known in the post-meltdown era as “nonprime” or “below-prime,” go to borrowers who would not meet the standards of government-backed mortgage companies Fannie Mae and Freddie Mac.
Carrington Holding Co., for example, will lend to borrowers with credit scores as low as 580, so long as they can prove adequate income and savings. The average credit score for a prime mortgage borrower now tops 700. Christopher Whalen, executive vice president and managing director at Carrington, says borrowers with banged-up credit histories are safe bets if they can show they have the income and savings to afford payments.
So far, nonprime loans by nonbank lenders are only a sliver of the market ‒ 5 percent, by some estimates. But the industry is mushrooming in size. The two fastest-growing lenders are not owned by banks.
To get a sense of the growth, one need look only at the volume of nongovernment-backed loans that are being pooled into mortgage bonds. Loans in these pools tend to be too risky to satisfy banks’ stringent lending requirements.
Companies are expected to issue more than $20 billion of the nonguaranteed bonds this year, up from $6 billion in 2012, according to an April report from Standard & Poor’s. By comparison, in 2005, just as home values began to dip and foreclosures to rise, companies bundled $1.19 trillion in mortgage-related investments that were not backed by the government.
In the industry’s mid-2000s heyday, bartenders could become loan officers and quickly draw six-figure salaries, while loose lending standards allowed housecleaners and field laborers to buy $300,000 homes with loans whose teaser rates rocketed upward after a few years, forcing them into foreclosure.
Those days are gone. Marquee-name lenders like Countrywide, IndyMac and New Century have closed their doors. While the scenery might be different, the cast of characters hasn’t changed.
“Five years down the road, and we’re back in the thick of it again. It’s a weird place to be,” says Cliff Rossi, who was a high-level risk management executive at Countrywide, Washington Mutual and Freddie Mac before the crisis.
Rossi got his start during the savings and loan debacle that felled 747 lenders in the 1980s and 1990s, he says, and left the industry during the 2008 crisis.
“In that intervening 20 years, we forgot what we learned in the ’80s,” he says. “I fear right now, human nature being what it is, that downstream, we could find ourselves in the same situation.” Rossi now teaches finance at the University of Maryland’s Robert H. Smith School of Business.
Most of the 25 executives identified by the Center for Public Integrity refused to be interviewed for this story.
At CS Financial, Chief Marketing Officer Neal Mendelsohn referred questions about Chief Operating Officer Paul Lyons to Ameriquest, where, according to his LinkedIn profile, he was director of whole loan sales until 2007, when the company stopped lending.
“There’s just the lingering stink of it that’s really kind of troubling,” Mendelsohn says of Lyons’ difficulty in shaking his past association with Ameriquest. The company’s practices were condemned widely before the crisis; in 2006, it agreed to pay $325 million to settle charges of widespread, fraudulent and misleading lending.
Van Dellen, the former IndyMac executive who is lending to flippers, hung up on a reporter and ignored an emailed interview request.
From Countrywide to PennyMac
Mortgage companies don’t just make money by pocketing the interest people pay on their home loans. In fact, many resell most of the loans they originate to other investors. Much of the lenders’ income comes from fees charged for everything they do: originating loans, bundling them into bonds and collecting payments from borrowers. They don’t necessarily need the loans to be repaid to make money.
PennyMac, a fast-growing company founded by former Countrywide Home Loans CEO and IndyMac director Stanford Kurland, is a sprawling concern that earns fees by originating loans in call centers and online. It consists of two intertwined companies: a tax-free investment trust that holds mortgage investments and an investment adviser that manages the trust and other investment pools, among other activities.
PennyMac buys loans from preapproved outside sales offices, bundles them and sells off the slices. The company manages other peoples’ mortgage investments, collects borrowers’ payments and forwards them to investors. It forecloses on properties and amasses portfolios of loans and mortgage-backed securities as investments.
By the second quarter of this year, it was among the fastest-growing lenders, extending $8.9 billion in loans, up from $3.5 billion in last year’s second quarter, the company says. Ninety-seven percent of the loans were purchased from outside lenders.
Most emerging nonbank lenders are smaller than their precrisis predecessors and specialize in a handful of these activities. That’s beginning to change, though, as more of them follow PennyMac’s lead, expanding their offerings and cobbling together companies that can make money at every stage of the mortgage finance process. They accomplish this through aggressive acquisitions or by buying the assets of bankrupt companies.
Among PennyMac’s first big investments was a joint venture with the Federal Deposit Insurance Corp. to buy and service $558 million in loans from a failed bank. PennyMac paid roughly 29 cents on the dollar for the loans and says the investment has performed well.
PennyMac is not nearly as big as Kurland’s former company, Countrywide, which made $490 billion in loans in 2005. But Kurland and his team appear to have grand ambitions.
Countrywide made the most high-cost loans in the years before the crash and is among the lenders considered most responsible for fueling the mid-2000s housing boom. It was founded in 1968 and by 1992 became the biggest home lender in the country.
“After spending 27 years of my career at Countrywide and assisting in growing the company into a large, widely-known enterprise that was highly regarded and well respected by regulators, peers, consumers, and other stakeholders, I faced the most difficult business, and personal, decision of my career,” Kurland said in an emailed statement. “In 2006, as a result of irreconcilable differences with the company’s prevailing management, I was terminated from Countrywide without cause and left the company.”
PennyMac spokesmen declined to elaborate on his reasons for leaving.
After Kurland’s departure in late 2006, to boost production, Countrywide “eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud,” according to a civil complaint filed last year by the Justice Department against Bank of America, which purchased Countrywide in 2008.
Kurland and other Countrywide alumni formed the tax-free PennyMac investment trust in 2009 “specifically to address the opportunities created by” the real estate crash, according to public filings. The 14 members of its senior management team had spent a combined 250 years in the mortgage business, the filings say.
This year, the former Countrywide executives who manage the investment trust sold separate stock in their investment advisory and lending firm, PennyMac Financial Services, which earns millions in fees for managing the publicly traded, tax-free trust. PennyMac Financial Services also manages separate mortgage funds for big-money investors.
The company’s name is so similar to those of government-controlled mortgage giants Freddie Mac and Fannie Mae that regulators forced PennyMac to add a disclaimer to its offering documents for potential investors, stating that it is not a government enterprise. Regulators also questioned PennyMac’s assertion that its managers’ experience was purely a strength and suggested that “the failures of Countrywide while under the management of these individuals” should be considered a risk factor.
PennyMac said in a separate written statement that the complexity of the mortgage business demands experienced and expert leaders. It said Kurland and his team “have demonstrated sensible leadership over decades in the mortgage industry” and noted that the venture is supported by major banks, government agencies, regulators and investors.
Kurland, who reportedly sold stock worth nearly $200 million before leaving Countrywide in 2006, last year earned about $6.1 million in total compensation from the two PennyMac companies. Some of the pay isn’t available to him until a few years after it is recorded. His stake is worth about $150 million, the company says.
Kurland still owns the $2 million, 9,000-square-foot house he bought in 1995 with a Countrywide loan. He’s also managed to keep a $4.9 million beachfront house in Malibu, Calif.
For many Countrywide borrowers, life has been considerably more difficult.
Brenda Fore, a former office supervisor who lives in rural West Virginia, has been on government disability benefits since a drunk driver struck and injured her in 1998. Her husband has suffered from a traumatic brain injury since 2010, also caused by a drunk driver, while he was working at a trucking company.
The Fores are trying to stay in the home they’ve lived in for 33 years, where they raised two children and several grandchildren. The home was sold in foreclosure when their loan payments nearly doubled.
The Fores’ house had been paid off for years, but Fore decided in 2006, when rates were low, to take out another mortgage to help her daughter buy a mobile home. The trailer sits in Fore’s yard because her daughter makes too little money working at a homeless shelter to afford a separate lot.
Fore, 60, got a loan from Countrywide that was based on an inflated appraisal, according to a lawsuit she filed in state court in 2011. The appraiser hired by Countrywide estimated the home’s value at $92,000, Fore says. An appraiser hired by her lawyer more recently said the house is worth about $61,000. Unlike fast-growth markets in the Sun Belt, home prices in West Virginia were relatively stable throughout the crisis.
Fore also got a second “piggyback” loan from Countrywide at a much higher rate.
Without the high appraisal value, her lawyer says, Fore could not have qualified for the second mortgage. She says she did not have a fair opportunity to look over the paperwork and identify any problems because Countrywide did not provide her with copies of the closing documents until 10 days after the close, according to the lawsuit.
Fore’s monthly payment doubled in 2007 because of the Countrywide loan, she says, from roughly $400 per month to more than $800. By that time, Bank of America had bought Countrywide. Fore asked Bank of America to change the loan terms until her husband’s workers’ compensation settlement cleared. The bank told her to keep mailing her payments, but it repeatedly mailed them back to her ‒ and deemed her loan to be in default.
One Sunday, she says, she returned to her house to find a pamphlet stuck in the fence notifying her that the house would be put up for sale.
“I thought, ‘Oh well, what are we going to do now?’ ” Fore says. “There wasn’t a whole lot we could do.”
Only after the family home was sold in foreclosure did the bank tell her that it had rejected her request for a loan modification.
Since then, Fore’s lawyer has offered to settle with the bank, seeking to have the foreclosure sale reversed so that Fore and her husband can remain in the house.
A Bank of America spokeswoman said the bank does not comment on open litigation. The company is negotiating a possible resolution that would keep the Fores in their home, the lawyer says.
Waiting for the recovery
The Fores are just one example of the wreckage caused by the subprime mania of the last decade. Millions of people across the country lost their homes, and tens of millions more lost jobs and economic security.
Meanwhile, many subprime executives left their companies. Some saw where the industry was headed and quit. Others were ousted by their boards or investors. Many of them didn’t go far.
Bob Dubrish ‒ a founder and CEO of Option One Mortgage, a top subprime lender owned by H&R Block that was shut down in 2007 ‒ teamed up with a firm backed by Lewis Ranieri, who was instrumental in developing mortgage bonds, the type of investments that fueled the economy’s spin off the rails in 2008. In early 2012, Dubrish was put in charge of wholesale lending for Ranieri’s lender.
Ranieri, through his company Ranieri Partners, had helped launch the mortgage investment firm Shellpoint Partners LLC, known to investors in its mortgage bonds as ShellyMac. He then purchased New Penn Financial, a Pennsylvania lender. New Penn rose from the ashes of one of American International Group’s subprime subsidiaries. AIG is the global insurance giant that received the biggest single taxpayer bailout of any financial company.
Standard & Poor’s, the credit rating company, was not impressed with the company’s speedy expansion.
“We view New Penn’s aggressive growth targets for all of its production channels, coupled with the recent appointment of a head of correspondent lending, as a potential weakness,” the company said in a report. The correspondent lending head, Lisa Schreiber, had run the wholesale division of American Home Mortgage, another member of the Subprime 25.
Dubrish, a former college football player, lives in the same $1.5 million home in Villa Park, Calif., (town nickname: “The Hidden Jewel”) he bought in 2000.
His boss at New Penn is CEO Jerry Schiano, who founded Wilmington Finance before the crisis. Schiano ran Wilmington until 2007, despite selling it to AIG subsidiary American General Finance for $121 million in 2003. In 2010, Wilmington and another of AIG’s companies paid $6.1 million to settle charges by the Justice Department that they illegally overcharged black borrowers during Schiano’s tenure, between 2003 and 2006. The companies denied wrongdoing.
Getting back on the horse
Another industry veteran looking to return is Thomas Marano, who led the mortgage finance division at Bear Stearns and was on the board of its subsidiary, EMC Mortgage. He then took over the mortgage subsidiary of GMAC, another top subprime lender. Lawsuits filed by federal regulators allege that Marano’s unit was so hungry for new loans to securitize that it weakened its standards and slipped bad loans into pools of mortgages that were resold to investors.
Asked recently about his plans, Marano said he’s toying with the idea of launching or buying a nonbank mortgage company.
“I’ve been modeling the numbers on … those opportunities and I’m intrigued with that possibility,” he told The Wall Street Journal. The mortgage business “is a pretty hot space right now, so I’m really looking at those two options, really doing it on my own or doing it with someone who’s got more of the infrastructure established.”
There are numerous reasons for Marano and his compatriots to launch mortgage companies right now.
Interest rates, while ticking up a bit lately, are still near all-time lows, fueling a boom in refinancing. The government wants to dial back its role in housing finance and encourage private investment.
Separately, a recent IRS ruling makes it easier for some big, consolidated mortgage companies to avoid paying most taxes. The IRS decides what investments can be held by real estate investment trusts, or REITs, companies that buy real estate investments, sell shares to investors and enjoy tax advantages. This summer, the IRS said REITs can avoid paying taxes on certain income from collecting mortgage payments. Mortgage servicing income is a crucial revenue stream for many lenders, particularly as rates rise and the refinancing boom slows.
PennyMac is the most prominent REIT among the new nonbank lenders, but many key precrisis companies also were set up this way: IndyMac originally was formed as a REIT to invest in Countrywide’s loans. American Home Mortgage was a giant REIT with taxable subsidiaries to carry out its lending.
Those companies succumbed quickly because they were highly leveraged ‒ meaning they relied on a lot of borrowed money but had relatively little cash in reserve. Concerned that the strategy could harm regular investors, the Securities and Exchange Commission proposed tightening regulation of REITs in 2011, a move that would have limited their ability to use leverage. The industry balked, and the commission so far has failed to act.
REITs and other nonbank lenders are regulated more loosely than banks, according to Kenneth Kohler, an attorney with Morrison & Foerster, who wrote about them in a 2011 client bulletin.
Regulation in all corners has increased, but “there is no question that the burden of the new requirements is substantially higher on banks,” Kohler wrote.
Banks are overseen by at least two regulators ‒ one responsible for their financial strength, the other for their business involving consumers. Nonbank mortgage lenders, by contrast, are overseen at the federal level mainly by the Consumer Financial Protection Bureau, which can consider only potential violations of consumer protection laws.
In March 2007, Robbins, then chairman of the Mortgage Bankers Association, warned during a congressional hearing that banning risky mortgages would kill the dream of homeownership for millions of Americans.
“Assertions that delinquency rates are at crisis levels and a greater percentage of borrowers are losing their homes are not supported by the data,” he said.
Lenders were “responding to consumer demand for product diversity, particularly in high-cost markets,” he said, by offering loans whose total balance actually could increase over time because borrowers were permitted to choose how much they paid.
Before the crisis, Robbins had founded two companies, which were sold for a total of $431 million. Mortgage losses tied to the second company, American Mortgage Network, helped sink Wachovia as the financial crisis peaked in October 2008. The bank was sold under regulators’ orders to Wells Fargo. Less than two weeks later, Wells received $25 billion of taxpayer bailout money.
Today, Robbins says he sought to warn his colleagues that lending without proper documentation would have “dire consequences.” He wanted in 2007 to draw a line between irresponsible lending and new kinds of loans that properly account for risk, he said in a recent interview. After Wachovia bought American Mortgage Network in 2005, Robbins says, he “really had no control or say” over what loans it offered.
“You want new products, you want innovation, and you don’t want to stifle it ‒ as long as you realize there has to be a solid foundation to underwrite the loan,” he says.
Until this summer, Robbins was CEO of Bexil American Mortgage, a company he founded in 2011 that employs executives from Robbins’ two previous subprime ventures. Bexil is offering adjustable-rate mortgages and allowing down payments as low as 3 percent.
Robbins remains committed to the mortgage industry.
“I love this business, helping to provide the American dream to our customers and getting paid well to do it,” he told Mortgage Banking magazine last year. He said he wanted back in at the bottom of the market ‒ what he called “the fun and exciting time in our business.”
Bexil, which he launched with a private investor, was a chance to start fresh. It lacks the massive legal liabilities that continue to mire what’s left of the old subprime lenders.
The ‘toxic business model’
Dan Alpert, managing partner with the investment bank Westwood Capital LLC, says there is a reason why the same players keep getting back in the game: There was no meaningful effort by the government to identify bad actors and hold them accountable.
“Had there been prosecutions,” Alpert says, companies wouldn’t touch anyone deemed responsible “with a 10-foot pole. The only thing people are concerned about is the loss of their freedom. They can lose all their money and make more money, but they take it quite seriously when jail is staring at them.”
Whalen, of Carrington Holding Co., says many of these arguments are misguided. Carrington began a decade ago as a small hedge fund and now has 3,000 employees who manage investments, lend and service home loans, and manage and sell real estate. He warns against painting mortgage industry professionals too broadly.
“Are they really in a legal sense bad people, or did they just mess up? Were they just trying to do deals?” he asks. He cautions against focusing too much blame on individuals like Carrington Chief Operating Officer Dave Gordon, who ran capital markets and servicing for Fremont Investment & Loan until 2007.
Blaming only mortgage lenders ignores the roles of overeager or disingenuous borrowers, Wall Street traders with voracious appetites for mortgage investments and even the Federal Reserve, whose easy money policies in the early 2000s encouraged lending and sent global investors on a quest for higher-yielding investments, Whalen says.
“I’m not absolving everybody from responsibility for doing stupid things, but you can’t paint everyone in this industry as though they were just doing this on their own,” he says, because mortgage lenders “don’t operate in a vacuum.” He says the U.S. economy slowed sharply after the terrorist attacks in 2001, and policymakers decided to help inflate the economy by boosting the housing sector.
He says new rules and fearful investors make it difficult to imagine offering irresponsible loans.
“That old kind of subprime lending is gone,” Whalen says. “We have prime and slightly-less-than prime. That’s it.”
“That won’t last,” says Susan Wachter, a real estate finance professor at the University of Pennsylvania’s Wharton School.
The companies rely mainly on fees from originating and servicing loans, an income stream that grows only if lending increases, Wachter says. To boost lending, she says, companies eventually will have to “undercut competitors by getting people into those loans on whatever terms possible.”
“That toxic business model is still out there,” she says, and it’s being exploited by the same people who “were feeding toxic mortgages into the system” during what she calls “the 2007 frenzy.”
The conclusion seems obvious to Brenda Fore, who is fighting to take back the house in which she spent her adult life.
“If it’s being built by the fellows who screwed it up last time, you’re going to have the same result,” she says. “The system was dysfunctional before, so its offspring are going to be dysfunctional as well.”
The Center for Public Integrity is a nonprofit, independent investigative news outlet. For more of its stories on this topic, go to publicintegrity.org.