Alex Blumberg: For example, a guy I met named Clarence Nathan. He worked 3 part time, not very steady jobs, and made a total of roughly 45 thousand dollars a year roughly. He got himself into trouble and needed money, so he took out a loan against his house. A big one.
Clarence Nathan: Call it 540 for round figures
Alex Blumberg: And you basically borrowed that from the bank and they didn’t check your income?
Clarence Nathan: Right. It’s a no-income verification loan. They don't do that. It's almost like you pass a guy in the street and say: lend me 540,000 dollars? He says, what do you do? Hey, I got a job. OK. It seems that casual even though there are a lot of papers that get filled out and stuff flies all over with the faxed and emails. Essentially, that's ... that the process.
Alex Blumberg: Would you have loaned you the money?
Clarence Nathan: I wouldn't have loaned me the money. And nobody that I know would have loaned me the money. I know guys who are criminals who wouldn't loan me that and they break your knee-caps. I don’t know why the bank did it. I’m serious ... 540 thousand dollars to a person w/bad credit. ...
Alex Blumberg: This is Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York [that makes loans and then bundles the mortgages and sells them to investment banks to peddle as Mortgage-Backed Securities]. Just to repeat, he was making 75 to a 100 grand a month. That's over a million dollars a year. Glen was just out of college. ...
Glen Pizzolorusso: We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That's all everyone's talking about.
Alex Blumberg: And when Glen wasn't working, he was doing his next favorite thing, spending ... preferably in the company of, and this is his term, b-list celebrities:
Glen Pizzolorusso: We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends. Christina Aguilera was doing some, I’m-Christina-Aguilera-and-I’m-gonna-get-up-and-sing kind of thing. Who else was there? Cuba Gooding and that kid from Filthy Rich: Cattle Drive. What was that kids name? Fabian Barabia? ...
Alex Blumberg: Glen had five cars, a 1.5 million dollar vacation house in Connecticut, and penthouse that he rented in Manhattan. And he made all this money making very large loans to very poor people with bad credit.
Glen Pizzolorusso: We looked at loans. These people didn't have a pot to piss in. They can barely make a car payment and we're giving them a 300, 400 thousand dollar house.
Alex Blumberg: But Glen didn't worry about whether the loans were good. That's someone else's problem. And this way of thinking thrived at every step of this mortgage security chain. A guy like Mike Francis, from Morgan Stanley, he told me he bought loans, lots of loans, from Glen's company, and he knew in his gut they were bad loans. Like these NINA loans.
Mike Francis: No Income No Asset loans. that's a liar's loan. We are telling you to lie to us. We're hoping you don't lie. Tell us what you make, tell us what you have in the bank, but we won't verify? We’re setting you up to lie. Something about that feels very wrong. It felt wrong way back when and I wish we had never done it. Unfortunately, what happened ... we did it because everyone else was doing it.
Alex Blumberg: It's easy to ignore your gut fear when you are making a fortune in commissions. But Mike had other help in rationalizing what he was doing. Technological help. Mike sat at a desk with six computer screens, connected to millions of dollars worth of fancy analytic software designed by brilliant Ivy league math geniuses hired by his firm, which analyzed all the loans in all the pools that he bought and then sold. And the software, the data ... didn’t seem worried at all:
Mike Francis: All the data that we had to review, to look at, on loans in production that were years old, was positive. They performed very well. All those factors, when you look at the pieces and parts. A 90% NINA loan from 3 years ago is performing amazingly well. Has a little bit of risk. Instead of defaulting 1.5% of the time it defaults at 3.5% of the time. That’s not so bad. If I’m an investor buying that, if I get a little bit of return, I’m fine.
Adam Davidson: Wait Alex. I want to step in for a moment because this is a very important piece of tape. A big part of this story, of this whole crisis, is that a lot of really smart people, people who knew better, fooled themselves with this data. It was the triumph of data over common sense. Can you play that tape again?
Mike Francis: All the data that we had to review to look at, on loans in production, that were years old, was positive.
Adam Davidson: As we now know, they were using the wrong data. They looked at the recent history of mortgages and saw that foreclosure rate is generally below 2 percent. So they figured, absolute worst-case scenario, the foreclosure rate may go to 8 or 10 or 12 percent. But the problem with is there were all these new kinds of mortgages, given out to people who never would have gotten them before. So the historical data was irrelevant. Some mortgage pools, today, are expected to go beyond 50 percent foreclosure rates.
In retrospect, the basic political-economic idea of the decade was that the financial elites would wind up with all the financial assets while the masses would be kept pacified with lots of nice consumer gadgets and big houses paid for by borrowing from the financial elites. A foolproof plan!
The key issue is that there was nothing going on in America in this decade that would suggest that below, say, the 75% percentile that human capital -- and thus the ability to earn income and to repay debt -- was increasing. Or was ever likely to increase.
In fact, the signs pointed toward a declining per capita ability to pay as the U.S. became increasingly Hispanic. But, no, you couldn't talk about that in polite society. Instead, we had an increasingly diverse, vibrant society so we must have an increasingly diverse, vibrant economy.
Ideas have consequences.