Michael W. Hudson's book The Monster has left me scared and paranoid. Every time the phone rings and I don't recognize the phone number, I start to sweat profusely. Is it... one of them?
Unfortunately, Hudson's book isn't a Stephen King (or even Stephen Coontz) work of fiction. It is horror, but it's not fiction. It's an investigation into the way mortgage-backed securitization, the mainstreaming of home equity lending, and a look-the-other-way regulatory regime, all combined into a perfect shit storm to wreck the American economy and destroy the middle class.
While the book concentrates on a few characters, the centerpiece being the late Roland Arnall, CEO of Ameriquest, its real villain is the root of all evil, money. In their quest for it, Ameriquest, First American Mortgage, and other mortgage brokers first reframed the once disreputable second mortgage, something you only took out if you were in desperate and dire straits, into the pleasant-seeming and even fair "home equity loan" or "home equity line of credit."
Although, as JP Morgan now admits, not only did incomes not grow during the Bush administration, but corporate accounts grew only because wages and benefits for the middle class were squeezed, we still bought cars and houses. How? With those equity lines of credit. With money we didn't have.
The Monster shows that not only was America's growth during the Bush Administration illusory, it was fraudulent. While salesmen with thousands of calls sold to people barely familiar with their first mortgage, much less their second, they were also doctoring the images, timing meetings to make sure customers were ill-prepared and time-pressured to just sign it all without reading it, and sometimes aggressively pressuring people to just sign. Back at "the lab," (a nickname some Ameriquest offices had for the office's copy room, where Wite-Out and scissors were used to creative effect), the loan paperwork would be doctored to reflect higher percentage rates, balloon fees, and other nightmares. Sometimes signers were given huge stacks to sign, not knowing that they were signing two mortgages, one of which was to be thrown out.
The entire disaster was a Ponzi scheme in which securitization (the conversion of bundles of mortgages into market-tradeable entities) fed huge funds into the system, and then groaning mortgages and other debts extracted huge funds from the wallets of ordinary citizens. When the music stopped, there were a lot of chairs missing, and a lot of people fell down. The current wave of foreclosures is not just because people lost their jobs in the disaster; it's because they lost their jobs after 10 million of them mistakenly bought mortgages they did not understand and did not appreciate were worse than their current mortgage.
The title of the book comes from a missing chapter in the First American Mortgage Co's sales manual. There were seven chapters, which had all kinds of psychological tricks for getting a customer to sign. (The most "cute" of which was that a salesman would always introduce himself three times-- once in the lobby of the sales office, then again after another person had lead the mark to his office, and a third time, after he had left the office on a contrived errand and returned. The idea was that the mark, having now "met" this salesman three times, was no longer convinced the he was a stranger but an acquaintance and possibly a friend.) "The Monster" was the secret chapter eight, a word-of-mouth only class-- sales trainees were forbidden from taken notes-- in which an old hand taught the sales trainees how to make a higher mortgage, with higher points and fees, look better than the mark's current mortgage. "Press the mark to hear the initial payment, make them ignore the refinancing fees, adjustable rate, or ballon payment, steer them clear, always say 'you hear their concerns' or 'that won't be a problem,' then steer them back to hearing the initial payment rate. Show them how a shorter-term mortgage will 'save them money' while making you rich."
Another mortgage company's president described his company's "LTV 80/20" as "the mortgage equivalent of a weapon of mass destruction." An LTV is the Loan-To-Value, that is, the ratio of the initial loan versus what the bank expects the value of the house to be when the loan ends. An LTV higher than 65% is generally considered a poor loan. The 80/20 loan was two mortgages issued simultaneously through two separate shell mortgage companies, for a total LTV of 100%! All of these companies had LTV loans in the 70%-85% range. These guys knew what they were selling.
And if he thought that was a weapon of mass destruction, I have to wonder what he thought of the third-party collateralized debt obligations and other "synthetic securitization" packages.
Hudson is a reporter, and he doesn't flinch at showing how many villains there were. The Federal Trade Commission comes in for a particular bashing as, in 2004, commissioners said "If there were any problems [in the mortgage industry], we would have heard about them," when in fact an average of 400 complaints a month were hitting their office. He shows how ACORN, that bugaboo of the right, was suborned by Ameriquest with supporting money into "looking the other way" as Ameriquest rampaged through poorly-educated minority neighborhoods in a deliberate and systematic way.
The Monster is a horror, but it's the reality in which we live. It's a picture of how one section of the financial industry blew up its alchemical laboratory, hid America's deeper flaws until it was too late, and transferred wealth up to Lehman Brothers, the biggest bank involved in sub-prime securitization. It shows how a well-educated, well-trained, motivated, unregulated, conscience-free industry set out to make money without limits, and in the process destroyed a once great nation.
Unfortunately, Hudson's book isn't a Stephen King (or even Stephen Coontz) work of fiction. It is horror, but it's not fiction. It's an investigation into the way mortgage-backed securitization, the mainstreaming of home equity lending, and a look-the-other-way regulatory regime, all combined into a perfect shit storm to wreck the American economy and destroy the middle class.
While the book concentrates on a few characters, the centerpiece being the late Roland Arnall, CEO of Ameriquest, its real villain is the root of all evil, money. In their quest for it, Ameriquest, First American Mortgage, and other mortgage brokers first reframed the once disreputable second mortgage, something you only took out if you were in desperate and dire straits, into the pleasant-seeming and even fair "home equity loan" or "home equity line of credit."
Although, as JP Morgan now admits, not only did incomes not grow during the Bush administration, but corporate accounts grew only because wages and benefits for the middle class were squeezed, we still bought cars and houses. How? With those equity lines of credit. With money we didn't have.
The Monster shows that not only was America's growth during the Bush Administration illusory, it was fraudulent. While salesmen with thousands of calls sold to people barely familiar with their first mortgage, much less their second, they were also doctoring the images, timing meetings to make sure customers were ill-prepared and time-pressured to just sign it all without reading it, and sometimes aggressively pressuring people to just sign. Back at "the lab," (a nickname some Ameriquest offices had for the office's copy room, where Wite-Out and scissors were used to creative effect), the loan paperwork would be doctored to reflect higher percentage rates, balloon fees, and other nightmares. Sometimes signers were given huge stacks to sign, not knowing that they were signing two mortgages, one of which was to be thrown out.
The entire disaster was a Ponzi scheme in which securitization (the conversion of bundles of mortgages into market-tradeable entities) fed huge funds into the system, and then groaning mortgages and other debts extracted huge funds from the wallets of ordinary citizens. When the music stopped, there were a lot of chairs missing, and a lot of people fell down. The current wave of foreclosures is not just because people lost their jobs in the disaster; it's because they lost their jobs after 10 million of them mistakenly bought mortgages they did not understand and did not appreciate were worse than their current mortgage.
The title of the book comes from a missing chapter in the First American Mortgage Co's sales manual. There were seven chapters, which had all kinds of psychological tricks for getting a customer to sign. (The most "cute" of which was that a salesman would always introduce himself three times-- once in the lobby of the sales office, then again after another person had lead the mark to his office, and a third time, after he had left the office on a contrived errand and returned. The idea was that the mark, having now "met" this salesman three times, was no longer convinced the he was a stranger but an acquaintance and possibly a friend.) "The Monster" was the secret chapter eight, a word-of-mouth only class-- sales trainees were forbidden from taken notes-- in which an old hand taught the sales trainees how to make a higher mortgage, with higher points and fees, look better than the mark's current mortgage. "Press the mark to hear the initial payment, make them ignore the refinancing fees, adjustable rate, or ballon payment, steer them clear, always say 'you hear their concerns' or 'that won't be a problem,' then steer them back to hearing the initial payment rate. Show them how a shorter-term mortgage will 'save them money' while making you rich."
Another mortgage company's president described his company's "LTV 80/20" as "the mortgage equivalent of a weapon of mass destruction." An LTV is the Loan-To-Value, that is, the ratio of the initial loan versus what the bank expects the value of the house to be when the loan ends. An LTV higher than 65% is generally considered a poor loan. The 80/20 loan was two mortgages issued simultaneously through two separate shell mortgage companies, for a total LTV of 100%! All of these companies had LTV loans in the 70%-85% range. These guys knew what they were selling.
And if he thought that was a weapon of mass destruction, I have to wonder what he thought of the third-party collateralized debt obligations and other "synthetic securitization" packages.
Hudson is a reporter, and he doesn't flinch at showing how many villains there were. The Federal Trade Commission comes in for a particular bashing as, in 2004, commissioners said "If there were any problems [in the mortgage industry], we would have heard about them," when in fact an average of 400 complaints a month were hitting their office. He shows how ACORN, that bugaboo of the right, was suborned by Ameriquest with supporting money into "looking the other way" as Ameriquest rampaged through poorly-educated minority neighborhoods in a deliberate and systematic way.
The Monster is a horror, but it's the reality in which we live. It's a picture of how one section of the financial industry blew up its alchemical laboratory, hid America's deeper flaws until it was too late, and transferred wealth up to Lehman Brothers, the biggest bank involved in sub-prime securitization. It shows how a well-educated, well-trained, motivated, unregulated, conscience-free industry set out to make money without limits, and in the process destroyed a once great nation.
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