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I think it was equal parts skeezy predatory lending, dumbass people trusting in banks way too much, and re ed Wall Street aholes playing around with financial schemes that made no sense.
Gee, lookie here, pay was linked getting people into sub-prime loans because they paid higher commissions, even if the borrower might have qualified for a prime loan.
oops.
So much for the conservative over-simplification that says that the problem was caused by people trying to get loans they weren't qualified for.
Baltimore's tale of sub-prime woe
By Matthew Price
BBC News, Baltimore, Maryland
Boarded-up homes are common in some parts of Baltimore
The awards on top of the cabinet dominate Beth Jacobson's small office.
Beth Jacobson worked for Wells Fargo - one of the largest banks in the US - for nine years. She was a champion salesman for the company, shifting huge numbers of sub-prime mortgages.
Some awards are the shape of table-top obelisks. Others look more like local football club trophies, with small metal plates screwed onto them, and a list of dates and numbers.
The numbers are large.
"That was for $4.9m [£3m] for 17 sub-prime loans. This month was 26 sub-prime loans. I did over $6m at that point," she says.
She says her tactic was to make sure all the loans she issued were for sub-prime borrowers.
"It was a lot easier to put people into a sub-prime loan. If you take the application and said 'OK, how much do you have in the bank?', and then not ask for any back-up do entation, that would keep it as a sub-prime loan," she explains.
"If you would have [asked] for a couple of bank statements, that would have proved that they could have gone prime, but if the sub-prime loan officer [has] already been able to sell that rate to that customer, then why would you take it prime and cut your commission by two-thirds?"
Liar loans
Under a sub-prime mortgage customers didn't have to prove their income. They didn't have to pay a deposit. The lender made a lot of money - and the customer typically ended up paying a much higher rate of interest.
The African American churches in Baltimore were an excellent source of business
Beth Jacobson, former sub-prime loan saleswoman
There has been some anecdotal evidence that companies were deliberately pushing people into such loans when they simply weren't suitable.
Beth Jacobson is one of the first to lift the lid on what was going on, and therefore to shine some light onto the origins of the housing crisis which helped ignite the global recession.
"I think to some degree you knew you were putting people into loans they really didn't need to be, but we were doing exactly what the company asked. At that time in the office we'd say 'we're riding the stagecoach to '."
Beth Jacobson is now a key witness for the city of Baltimore.
The city is suing her former company Wells Fargo, accusing it of pushing sub-prime loans on people who qualified for prime loans, singling out African Americans for mortgages they couldn't afford, pushing many into foreclosure and ultimately leaving the city to pick up the pieces.
Devastated neighbourhoods
On street after street in some parts of Baltimore, you can walk past boarded-up home after boarded-up home. Chipboard is nailed over the windows. A padlock secures the front door.
They pedal their drugs in there
Gay Pierce, Baltimore resident
On one doorstep there's a man cleaning up an old rusty tool.
"I found it in the street, might be worth something," he says.
Next to him sits a woman, her two front teeth missing.
Gay Pierce says she spends her days trying to keep the streets clean. The empty houses though are making that difficult.
"They pedal their drugs in there," she says, pointing towards an empty building. "Sell drugs, [they hold] dog fights, they sleep in there when they're homeless."
People talk of the rats which colonise empty homes, and then head next door to the inhabited buildings to look for food.
One of the things that is noticeable is that the foreclosures are concentrated in predominantly African American areas, and that forms part of the city's case against Wells Fargo.
For years in such districts it was often impossible to get a loan - a process called red lining.
Now the city says banks engaged in reverse red lining.
They pushed sub-prime mortgages in places where people were historically unable to get loans, and perhaps didn't understand the details of the mortgages they were being sold.
Role of churches
The sub-prime salesmen also used an unlikely source of influence - the black churches. "The African American churches in Baltimore were an excellent source of business," Ms Jacobson says.
We have principles, systems and processes [that] team members must follow that ensure race is not a factor in the pricing and products we offer
Wells Fargo
"The whole premise was to tell people that for everyone who gets a loan through Wells Fargo, the company would donate $350 to the church. So that was a way for the community to feel like they're helping their church, but at the same time they're getting set up in a sub-prime loan.
Wells Fargo denies the charges. It says it is associated with only 1% of the 33,000 foreclosures in Baltimore and that it has worked "responsibly and fairly" to help more African Americans own their own homes.
In a statement the bank says: "We have principles, systems and processes [that] team members must follow that ensure race is not a factor in the pricing and products we offer."
In her office - next to the cabinet with the awards - Beth Jacobson is now working to help people avoid foreclosure. She believes that counts for something.
"I don't feel guilty because I was doing what I was asked to do by the company I trusted. Unfortunately it did set people up for failure, but now I do feel that I've kind of redeemed that by going out to help people in order to save their houses from foreclosure," she says.
Redemption though will not come swiftly for the millions who have lost their homes, nor for the city neighbourhoods blighted as a result.
The mortgage brokers and the banks knew how risky sub-prime mortgages were, but until the housing boom went bust, no one worried about the long-term consequences.
http://news.bbc.co.uk/2/hi/business/8118376.stm
I think it was equal parts skeezy predatory lending, dumbass people trusting in banks way too much, and re ed Wall Street aholes playing around with financial schemes that made no sense.
DING!
We have a winner!
As it turns out, it wasn't re ed at all. The biggest players gambled that the USG would backstop most of the irresponsible risk.
And it did.
I'd also add in politicians who didn't want to rock the boat for fear of interrupting the flow of campaign contributions.
I don't think many are really arguing your point here, but I still insist that the individuals that took out these loans were still gambling without doing any research. Ignorance is bliss until your rate adjusts and you're ed.
Having said that, my first job out of college was with Ameriquest Mortgage, our commission increased on sub-primes based on how high you could "sell" the interest rate and how many points you could tack on.........that's ed up........and I quit after three months when I finally figured out how ed up it was. So absolutely, the lenders are to blame as well.
Yup.
Moral hazard at its finest.
That is why I think we need to really ratchet up reserve requirements for big banks.
If your ass is "too big to fail" then you need to pony up some solid cash onhand to make sure we don't have to pay out.
The thing about this is that the banks and lenders themselves have collectively come to the revelation that they need to modify the way they reward performance to encompass risk taken on.
Where do we factor in the inherent moral hazard within and without Fannie/Freddie? How about the inability of the Fed to manage the currency?
If it were up to Obama, we'd rely on the Fed as an omnibus regulator -- so I'd say they have us right where they want us with their *inability to manage the currency*. The proposed solution to the debt bubble is yet more debt, plus unprecedented growth of the monetary base.
Bernanke has already insinuated that a Fed audit would destroy capitalism as we know it.
The financial crisis/bailout already has, so I'm all for it.
Any other takers?
Related: SCOTUS says states can prosecute banks for predatory lending.
Agreed.
Touche.
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