We all know the story to one degree or another. The financial sector set up a system that encouraged mortgage initiators to prefer subprime loans to prime loans. They stopped asking for any documentation proving an ability to pay back home loans. They sought out unsavvy borrowers and steered them to riskier loans because they got bigger bonuses that way. The garbage loans were packaged up into derivatives and given deceptively high credit ratings. Then those derivatives were sold to unwitting customers who lost tons of money when they went bad. Meanwhile, the big banks bet against their own financial products even as they marketed them as safe investments. When the house of cards fell, the government had no choice but to save the banks because our economy can’t function without a banking system. Then the bankers took the money and paid themselves big bonuses while millions lost their jobs, their homes, and their retirement security.
There are a few bankers who are honest about what happened.
As a regional vice president for Chase Home Finance in southern Florida, [James] Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.
“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”
“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.
Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.
“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”
Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.
“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”
One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.
These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.
Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.
In late 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He says he bears no animus toward Chase, but he does think it is profoundly unfair that troubled banks have been rescued while troubled homeowners have been evicted.
I kind of regret that I didn’t spend most of the last decade living in a series of multi-hundred thousand dollar homes. I did sell two homes, making a great return both times. That’s the only reason I was ever able to become a blogger. But that was just an accident, or good fortune. It wasn’t an investment. It was life unfolding in a fortuitous way. I never lied about my income to get a mortgage. And I was never stupid enough to get suckered into lousy terms.
When it came time to save the system, the Fed wound up giving the banks the equivalent of $25,000 for every American citizen. I wonder what would have happened if they had just given the people that $25,000 instead. I suppose we would have all descended into some kind Mad Max war of all-against-all. Most of us would have died and become food for those who survived. Believe me, I understand that the too-big-to-fail concept isn’t some kind of joke. The banks had to be saved. But I don’t see any reason why the people cannot exact their revenge now, at their leisure. Of course, it’s not too late to send us our checks.
