The Return of Option One
Unlike Alice Epps, the blind woman I’d come to meet that day in court never tried to profit from the house price boom and instinctively kept her distance from mortgage sharks. But in some waters sharks abound.
Fifteen years earlier Eletta Robertson had been living as a renter with her own six children, three orphaned relative children, and her mentally disabled cousin Curtis. This adult cousin stood quietly behind her wheelchair wearing a four-year-old’s grin except at moments when something startled him. A word from Eletta calmed him immediately.
When her landlord wanted to sell the house, Mrs. Robertson bought it as a way to keep the large family together. The landlord helpfully waited six months while Eletta worked two jobs to pay off some credit card debt. That allowed her to qualify for a decent, old-fashioned, fixed-rate mortgage.
Seven years later she had a fall at work (she’d been an aide in a children’s group home) that left her in a wheelchair. The gradual blindness was diabetes related.
Before the Great Recession the most common causes of bankruptcy were job loss and catastrophic medical bills. Mrs. Robertson suffered from both. Yet she’d managed to keep current on her mortgage payments for another seven years with the help of workers’ compensation. Unfortunately, she’d been transferred to California’s state disability system. With its recession-slashed budget, the state didn’t cover enough of the costs when Eletta had new medical bills. Mrs. Robertson fell behind on her mortgage payments and caught up a couple of times. But when a fallen tree created electricity damage, the repair bill combined with the increased medical bills put her over the line, and she went bankrupt.
She was in court that day to firm up a seven-week delay that her Legal Aid lawyer had already negotiated with the bank’s lawyer. He expressed regret that all he could do was buy her a little time. Eletta responded with gratitude. It would give her time to find a place where she could keep everyone together. That’s what mattered.
Outside the courthouse Mrs. Robertson answered my questions courteously because that was her nature. But she didn’t have a “victim’s” passion to tell her story. From her point of view, she couldn’t pay her mortgage, so she lost her house. It was a misfortune, not an injustice.
Before we parted, however, she broached a topic that stirred other emotions. “May I tell you something?” And here stress came into her voice. A couple of years earlier a close relative had transferred a house into cousin Curtis’s name. “They gifted him the property, and they was gonna gift it back to themselves. In the meantime, they had Curtis sign for a $318,000 mortgage.”
“What?!” I exclaimed.
Eletta had become aware of it through an IRS letter about taxes Curtis would owe. She thought that it must be an error. “Then I got his credit report, and it was right on there; he borrowed for a mortgage. So I called Option One to get that changed.”
“Option One?!”
Option One is the name I asked my readers to remember. It’s the loan company involved in a foreclosure that Judge Schack of Brooklyn dismissed as fishy. He noticed that the company had transferred a mortgage the day before the borrower signed for it. “Nonexistent mortgages and notes are incapable of assignment,” Judge Schack wrote. With that he bought a “little guy,” in this case a black hospital worker from Brooklyn, more time.
“My question,” Eletta continued, “is how in the world did that go through? Curtis don’t work; Curtis can’t show no pay stubs; so how could they give Curtis a mortgage?”
That’s a reasonable question. One innovation of the securitization craze was a mortgage that requires no proof of stated income. It’s commonly called the “liar’s loan.” But looking at cousin Curtis, I realized that Curtis can’t even lie!
Still, his signature had been accepted by someone connected with Option One. His brief foray into home ownership might have jeopardized his Supplemental Security Income payments for the rest of his life, Eletta feared. “So I had to go down to SSI and explain. What SSI did is put a restraining order against [the offending relative]. He couldn’t come around Curtis for three years.”
Now Eletta worried that Curtis’s spurious mortgage might threaten her family again. A rental agent she’d seen the day before took $30 per adult who would be living in the house as his fee for doing credit checks. “I tried to explain to the agent that I take care of all the bills. He said not to worry, there’d be no problem as long as there was no eviction on anyone’s record. But now that I think about it, they foreclosed that property. So maybe Curtis has an eviction against him.”
“If it’s really on his credit record,” I suggested, “I bet your Legal Aid lawyer can straighten it out with a couple of phone calls. I know he really wants to help.” That seemed to ease her mind.
“But I still want it to be clear,” Mrs. Robertson appealed to me. “Curtis never bought a house. And that debt shouldn’t be on his credit report when he leaves this world. That’s not fair to him.”
The Greatest Setback Since the End of Reconstruction
I hadn’t thought to put black home losers in a special category. But I happened to meet two black women in foreclosure court on the same day, and the Option One–related foreclosure that Judge Schack found so questionable concerned a house owned by a black man. It isn’t just coincidence that three black homeowners encountered quintessential subprime hustlers.
In the decades before the housing boom, traditional banks avoided mortgage lending in black neighborhoods. Legitimate bankers of the pre-boom era would deny drawing literal red lines around black neighborhoods. But in those days the minimal characteristic of a good loan was that the borrower be able to pay it back. Black incomes were, for reasons our good bankers might deplore, low and insecure—at least on the average.
So the inner-city lending niche was filled by just the kinds of “financiers” you would expect. Litton and Option One were among them.
But once traditional lenders figured out how to get ghetto loans rated AAA and then get them off their books, they could erase those invisible red lines and rush in. Indeed, the large regular banks were so anxious for a steady supply of subprime mortgages that they financed and/or bought the irregular lenders who already knew how to operate in those neighborhoods.
Soon you had the old ghetto lenders, now backed with seemingly unlimited new cash, offering no-money-down, interest-only, adjustable rate, balloon, and other oddly shaped mortgages to people who couldn’t afford them.
Eletta Robertson was never swept up into the housing bubble. She bought her house with a traditional loan and lost it through a traditional catastrophe. She experienced the subprime frenzy via her cousin Curtis’s loan.
Alice Epps, on the other hand, participated in the mania. She borrowed on the rising value of her paid-off house in order to make down payments on two more houses. If it had worked out, we’d call it leveraging. Though these women’s stories are as different as their temperaments, the economic results were the same.
Eletta Robertson lost the house she’d paid on for fifteen years, and Alice Epps lost the house she’d once owned free and clear. Results have been similar for a disproportionate number of black homeowners.
In August 2010 the industry newspaper Mortgage Servicing News reported that nearly 8 percent of African-American families had already lost a home in the Great Recession compared with 4.5 percent of white families. The number of imminent foreclosures would soon bring the home loss up to 11 percent for black families and 17 percent for Latino families, the publication estimated.
After the Civil War a large number of freed slaves deposited their savings regularly in the Freedman’s Savings Bank, many under the impression that it was connected somehow to the U.S. government. When the Freedman’s Bank failed in 1874 (after the pretty great recession of 1873), it dampened a black generation’s hopes to own homes, start businesses, or retire in security. It reinforced the notion that these middle-class things “just weren’t meant for us.”
The Freedman’s Savings Bank had nineteen branches in twelve states. It was large, but it never had as much as 10 percent of American blacks as its depositors. But close to 10 percent of today’s African-American mortgage holders have already lost their homes in the Great Recession. For most of these families their homes were their major or only wealth. The Great Recession has produced the greatest setback to black economic equality since the Freedman’s Bank crashed. And that’s just so far.
Mortgage Moralities
When the foreclosure wave first hit, conservatives blamed greedy, shortsighted borrowers. Weak people unwilling to defer gratification bought houses they couldn’t afford. Liberals blamed greedy, shortsighted lenders. Cunning bankers made stupid loans because they could pass the risk to investors and the government.
I encountered quite a range of moral attitudes among borrowers and lenders. But I’m not sure how much these different personal moralities contributed to the crisis.
Borrowers like Cindi and Amanda had little choice but to pay high prices for houses; still, they hoped to profit when those prices went even higher. When prices fell instead, they sought to cut their losses in whatever way worked best for them. Like most homeowners, they felt neither gratitude nor malice toward the banks that lent them money. It’s hard to feel a personal obligation when one’s mortgage loan passes through so many hands. Still, a few borrowers like Eletta Robertson thought of their bank debt as a personal promise and tried to pay as long as possible.
When I arrived in California, the upright Balty Alatas planned to go on paying his mortgage, even though he couldn’t. A year later he stopped paying, even though he could. This crisis is fraying our national ethic about debt. I wonder if it applies only to mortgage debt, and I wonder if the lawlessness will be lasting.
Alice Epps was trying to turn one paid-off home into three. Some might call her a good mother who tried to provide secure nests for her children by leveraging the only chunk of capital she was likely to control in her lifetime. Others might say that she tried to take advantage of loose credit and failed because she didn’t have the knowledge or discipline.
To Bibi San Antonio houses are for speculation: her goal was to buy cheap and sell dear. When house prices dropped, Bibi demonstrated her own kind of morality by getting back to former customers and advising them to default right away. She felt no such loyalty to the banks that had paid her commissions.
Bibi’s daughter, who loves her mother “to death,” notes that her mother shares certain moral attitudes with big financiers. But as a “capitalist without capital,” she’ll never be “inside” enough, her daughter says, to get in on the next pyramid scheme early.
I’m not “inside” enough, myself, to generalize about big bankers and their mortgage moralities. But here’s someone who is.
A CNBC program on the mortgage crisis ended by asking our former Federal Reserve chairman Alan Greenspan why no one saw the mortgage crisis coming and told the bankers, “You know what, this is going to end badly.”
Greenspan answered: “It’s not that they weren’t aware that the risks were there; I mean, I spoke to them. It’s not that the people were dumb: they knew precisely what was going on. The vast majority of them thought that they knew when to get out. It was a failure of our ‘best and brightest.’ ”
Bibi, too, thought she knew when to get out. She understood her daughter’s warnings about the bubble. She just didn’t think it would burst within five years. By the Bibi San Antonio/Alan Greenspan morality, our top bankers would have earned the title “best and brightest” without quotation marks if they’d managed to dump the losses onto others in time.
Like Bibi, Greenspan’s bankers didn’t think of houses as places to live. Though they were allocating the nation’s capital, they didn’t ask how many houses are needed, where should they be built, can the people who need them afford to buy them? Their only question was, how many more of these mortgages can we sell to investors? The investors in turn were asking, “How much more of this cash can I safely unload?”
This wild mortgage lending wasn’t dictated by masses of poor people storming the banks demanding credit. It was fueled by a relatively few people with large piles of money that desperately needed to be invested. Hedge fund owners, pension fund managers, and European bankers are among the folks who bought mortgage-backed securities. But like others charged with great piles of cash to invest, they can reasonably blame the money itself.
You and I may not be used to thinking of big piles of money as a problem, but they can exert unbearable pressure. Feckless borrowers and greedy bankers we have always with us. It’s the piles of money they lend and borrow that expand, change shape, and sometimes become inordinately demanding. These incorporeal and amoral wads of capital exerted pressures that led to the Great Recession.