RICHARD HICKERSON WAS SEVENTY-NINE YEARS old, dying of cancer, with a lesion the size of a tennis ball that was slowly taking over his liver.
Dick, as everyone called him, had been a garrulous man. Generously overweight and given to wisecracks and Hawaiian shirts, he’d spent almost his entire life in and around Los Angeles, with the exception of the four years as a navy cook after World War II and the two years he worked in Arizona when his children were young.
Dick had lived a good life, retiring at age sixty-seven from a career at the local water department, but now it was coming to an end. His doctors prescribed painkillers to make his chemotherapy easier, but it wasn’t enough. He drank, hiding spent vodka bottles around the house so that his children wouldn’t see them.
His seventy-seven-year-old wife, Patricia, was also sick, three years into the downward spiral of Alzheimer’s disease. A former executive at a company that printed personal and business checks, she had lost the ability to comprehend simple financial transactions such as making change or paying bills. On her worst days, Patricia experienced hallucinations. “Please, please—you have to come get me,” she said during a call home to her eldest daughter, Sandy Jolley, after she was hospitalized for knee replacement surgery. “They have locked me in the basement with little children who are screaming.”
When Patricia returned home from the hospital, she was docile, submissive, childlike. She stopped tending to the rose bushes she’d planted alongside the row of fruit trees in their backyard. She had enjoyed computer games such as Solitaire but stopped playing them because she could no longer do the math required to play cards.
The dementia was hard for Sandy to take. A fiercely independent woman, with straight black hair and intense brown eyes, Sandy had, at age fifty-three, moved back home to take care of her parents. She loved them, but the role did not come naturally.
Sandy had left home at nineteen for an ill-fated marriage to an airline pilot, divorced, and then raised their daughter, Kristin, as a single mother, spending much of the 1980s selling computer hardware up and down the West Coast. She was driven; the sort of woman who has an opinion about everything—a trait she tried to balance by rigorously practicing meditation and yoga.
Now, with Kristin grown, Sandy did her parents’ shopping, paid their bills, and did their laundry—all while working as an event planner for an organization that sponsored networking luncheons for professional women at hotels and conference centers in downtown Los Angeles and Beverly Hills. However, her job allowed her to work from home much of the time.
Enfeebled by their illnesses, the Hickersons did what a lot of old people do as the end nears: they watched TV in the living room for hours. Dick would sit in his favorite chair, with his golden retriever, Travis, in his lap; Patricia, on the sofa. Dick usually picked the station. He loved reruns of The Rockford Files, a 1970s NBC drama starring James Garner as fast-talking Southern California private detective Jim Rockford, who deployed wordplay more frequently than his unpermitted Colt revolver. Another favorite was Hart to Hart, an early-eighties ABC crime show starring Robert Wagner and Stefanie Powers as a wealthy couple who often find themselves working as amateur detectives.
Dick Hickerson grew up in a solidly middle-class family. His father, Percy, owned a small tool and die factory. But according to census records, Percy rented the family home, a stucco, single-story Spanish-style bungalow in West Los Angeles, where he and his homemaker wife, Ella, raised Richard and his older brother, William.
Homeownership came by way of the GI Bill. When Dick returned home from the navy in 1954, at the age of twenty-seven, he and his new wife, Patricia, used a loan backed by the Veterans Administration to buy their first home: a single-story bungalow in the far-western reaches of the still-rural San Fernando Valley. As their family grew, and the equity in their house grew along with it, they got another VA loan to buy a slightly larger home in the horse-pasture suburb of Chatsworth. Finally, in 1980, they used a fixed-rate VA loan to buy the two-story home in neighboring Thousand Oaks, where they would live for more than twenty years.
The house lacked a swimming pool but was otherwise the very definition of the suburban Southern California domicile many Americans dream of. It was simple but spacious, painted white with decorative black shutters. There was a lemon tree, a hydrangea bush, and a wooden bench on the front lawn, and a two-car garage where Dick installed a workbench and they parked a late-model Oldsmobile sedan.
They lived on Benson Way, a side street just north of Highway 101, slightly up a hill. From their second-floor bedroom in the back, which faced north, Patricia and Dick could see for miles, past the future home of the Ronald Reagan Presidential Library, to the mountains behind, while a smaller front bedroom boasted a panoramic view of the Santa Monica Mountains.
They had so many memories there. The Hickersons built a deck, and for years, on the Fourth of July, they invited the entire family—their four daughters, one son, and eventually seven grandchildren, along with many of their friends and neighbors—over for a barbecue that ended with fireworks. As he grilled, Dick would crack jokes that, at least to him, never got old. One favorite: he’d yell for Patricia to get something out of “the icebox” just so he could hear her respond, in frustration, “We don’t have an icebox; it’s a refrigerator.”
Now, such hosting duties beyond them, Dick and Patricia stared at the screen. Not only the same shows, but the same commercials played over and over again. The pitchmen were James Garner and Robert Wagner.
The two actors were selling reverse mortgages, a financial product available to Americans sixty-two and older that allows them to pull money out of their home. They are, as the name suggests, the reverse of a traditional mortgage. Rather than lending an amount of money that must be paid back gradually over time, with interest, the reverse mortgage company allows a senior citizen to borrow cash against their house and never asks for it back. Instead, the lender makes money by charging interest and fees each month and folds those charges into the principal. As time goes on, the balance grows larger, often far outstripping the amount of money the homeowner actually receives. When the elderly borrower dies, the loan comes due. At that point, the reverse mortgage lender is required to offer the house to the heirs—for either the size of the loan or 95 percent of the home’s appraised value, whichever is smaller. The loans can grow so big that foreclosure is common, with the bank taking the house.
The Hickersons didn’t need money. They weren’t hurting for cash. Late in life, they had a $300,000 investment portfolio and received $2,600 a month in Social Security. They still owed $120,000 on the house, thanks to a series of refinances over the years, but they weren’t underwater. They had about $400,000 in equity in their home, and their mortgage payments were well within their means—just $600 a month—which they paid using the interest from their savings.
Still, Dick was worried about his wife. How would she fare once he was gone? He’d asked his daughter Sandy to research what veterans’ benefits might be available to her as a surviving spouse. Since Patricia had already been diagnosed with Alzheimer’s disease, a preexisting condition, long-term-care insurance would not be available.
Garner represented the biggest reverse mortgage lender, Financial Freedom Senior Funding. The former Jim Rockford was an old man now, with a raspy voice and a grey, receding hairline. He wore a blue sweater vest and stared into the camera on an empty set with a digital image of the red, white, and blue logo of Financial Freedom Senior Funding waving like an American flag behind him. It was a soft sell, using the same sort of folksy straight talk Garner’s characters used on TV. “I’d like to talk to you about something you should know. It’s called a reverse mortgage,” Garner said. “It’s a safe, easy way to get tax-free money.
“Now, I’ve got to tell you I was reluctant to talk about reverse mortgages because, like a lot of folks, I didn’t understand the facts,” he added. “But as I learned more, I realized that this is something that many senior homeowners can benefit from. I sure think you should at least look into it.”
Dick reached for the phone and called the number on his screen. A few days later, a packet came in the mail, and soon a salesman arrived at their door.
THE SALESMAN, LESLIE Barnhart, lived over the hill in Simi Valley, about ten miles away. He was new to reverse mortgages, having been trained at a seminar in Orange County the previous December. It was easy. There was no license or exam required to sell reverse mortgages. He was paid 100 percent on commission: $1,300 per transaction for loans based on preset appointments and $2,500 for cold calls. A veteran salesman in his midfifties, he also held a valid California real estate license and sold long-term-care insurance. The more he sold, the more money he made. On the other hand, if he failed to sell, he made no money, so while James Garner’s television pitch was soft, Les Barnhart’s was significantly harder.
His first visit to the Hickerson home was on Friday, March 11, 2005. The weather was sunny and mild, the high 66 degrees. Barnhart came with his standard presentation: a nineteen-slide red, white, and blue PowerPoint deck illustrated with stars and piles of cash, with text punctuated by exclamation points.
“With a Reverse Mortgage, you don’t have to make monthly payments,” one of the first slides read. “Instead, a Reverse Mortgage pays you!” Said another: “You can continue to live in the comfort of your own home and enjoy its full appreciation while receiving monthly tax-free cash advances and long-term financial security.”
Barnhart’s contract was with Pacific Reverse Mortgage, a San Diego company that sold loans to Financial Freedom the same day it made them. So, the salesman wasn’t the only player whose interest lay solely in selling. His employer was also essentially a sales outfit. If Barnhart did his job and got the Hickersons to sign, Pacific Reverse Mortgage would never have to pay a cent—that would be the responsibility of Financial Freedom. The way the system worked, it wouldn’t matter to Barnhart or his employer if anything went wrong after they originated the mortgage. By then, they would be long gone.
In his presentation, Barnhart downplayed the possibility that the bank might, in theory, take the Hickersons’ home. The house would remain in their name until they both died, he said, and, at that point, their heirs would have the choice of keeping the home or selling it. There it was, in PowerPoint:
“How safe are Reverse Mortgages? They are totally safe. It is impossible to fall behind on payments because there are none to make.”
“So, you ask, ‘What’s the catch?’” the final slide read. “None.” The government, in the form of the Federal Housing Administration, “has designed this so there are no catches.”
That Sunday, two days after his initial visit to the Hickersons’ home, Barnhart was back. Dick and Patricia invited him to stay for lunch. He returned again later in the month and brought Patricia flowers. Each time Les visited, Sandy was out—either working or running errands for the household—and her parents never told her about the salesman’s visits. She had no idea a reverse mortgage was even under consideration; she was primarily concerned with their health.
Then, on May 12, 2005, a day after Sandy took her father to the hospital, where he was placed under general anesthesia for a liver operation, Barnhart returned to oversee the signing of the loan documents.
Dick was home, recovering, when Barnhart arrived. The salesman came at 3:30 in the afternoon and waited 45 minutes for a notary to show up. Then the four of them went through the stack of documents and disclosures page by page. Under the terms of the reverse mortgage, the Hickersons’ existing $120,000 home loan would be paid off, and $85,000 would be wired into their savings account.
That $85,000 would be all the money they’d get. Then the interest would start accruing, and the amount they owed would grow. Their reverse mortgage was an adjustable-rate product: the interest started at 4.8 percent but could go as high as 14.8 percent depending on market conditions. There were also fees—$17,443 to start—and more as the years went by. They also couldn’t move, the documents said. If they both left the property, they were breaking the terms of deal, and the lender could take it in foreclosure.
Patricia and Dick initialed the disclosures and signed their names on the ninth and tenth pages of the loan document. Even in her frail state, Patricia exhibited exquisite penmanship; Dick’s signatures were illegible.
Their businesses concluded, Leslie Barnhart packed up his material and drove off. It wasn’t until a few days later that Sandy learned about the loan, when her father told her over breakfast. “I found a way to take care of your mother,” he said. “I got a reverse mortgage.” She didn’t follow up, though, because in the same conversation, just a moment before, Dick had given Sandy a piece of bad news: he would be heading back to the hospital for another surgery. Despite chemotherapy, his baseball-sized tumor, which he referred to as a “spot” on his liver, was still growing. “The conversation was completely around his surgery and what that was going to entail,” Sandy said later. Dick also suffered from severe heart disease and had already undergone many surgeries. “For some reason, this one scared me,” she recalled. “It really worried me.”
Her father’s heart gave out during the operation. Sandy learned of his death at work. That day, June 21, 2005, she had started a new job: working the predawn shift behind the deli counter at Vons, a Southern California supermarket chain. The pay was terrible, but the shop was union, and the job offered health insurance, something she didn’t get through her contract job as an event planner. It had been five years since Sandy moved home to take care of her parents, but at age fifty-seven, she also needed to take care of herself.
As fate would have it, Sandy worked for Vons only that one day—and not even a full shift. At five thirty in the morning, her sister Julie called Sandy on her cell phone to let her know the bad news.
Sandy left work immediately. She drove home to find her mother hysterical and inconsolable. Patricia said the hospital had called and asked what she wanted to do with her husband’s body. She didn’t understand why this would be. “Mom was very upset and mad at my dad for leaving her,” Sandy said. “Over the next year, Mom said over and again how mad she was that Dad had left her. She just couldn’t comprehend that he had died.”
Six months after Dick’s death, Les Barnhart sent Patricia a holiday card urging her to buy Juice Plus+, a supplement that purported to be “the most researched nutritional product in the world.” In an accompanying letter, he claimed that the pills, which packed the “nutritional intensity of 17 fresh fruits and vegetables,” had helped him beat colon cancer. “Dear Pat,” the letter began: “This morning I realized that I needed to send you a letter because my health experience should not be kept secret! . . . As a valued client and friend, I’m extending an invitation for you to learn about something that has been of great benefit to me and my family.” The letter was cribbed nearly verbatim from a DVD produced by Jack Medina, a strength and conditioning coach to many Olympic gymnasts. It was signed “Les Barnhart, Certified Senior Advisor.”
WHEN THE HICKERSONS signed their reverse mortgage with Financial Freedom, they didn’t know much beyond what the salesman had told them and what they’d seen in the ads on TV. They didn’t know about the case of Lacy Eckhardt, whom Washington Post columnist Kenneth Harney wrote about in 2002. Eckhardt, a widow in Westchester County, New York, had received $58,000 in cash over a thirty-two-month period. When her home was sold a few months later, her family received a bill for $765,000.
“Sound like a nightmare? It’s not. It’s an actual mortgage transaction that a subsidiary of the Wall Street firm Lehman Brothers insists is legal, fair, and what the borrower requested,” Harney wrote. “Welcome to the world of reverse mortgages, where poorly advised seniors—and their heirs—can lose tens of thousands of dollars almost overnight.”1
FINANCIAL FREEDOM WAS no longer owned by Lehman Brothers when Les Barnhart got Dick and Patricia Hickerson to sign on the dotted line. Lehman had sold it the year before to IndyMac, a fast-rising thrift based down the road in Pasadena that would later become a poster child for the global financial crisis.
The reverse mortgage company was a natural fit at IndyMac, a corporate creature of the housing bubble, where the focus was on making as many loans as possible, as quickly as possible, and then making even more the following quarter. The company, which did not even exist in 2000, made an astonishing $38 billion in loans in 2004, the year it acquired Financial Freedom. That number would skyrocket by 50 percent the following year, to $60 billion. In 2006, at the apex of the housing bubble, IndyMac issued an astonishing $90 billion in mortgages.2
While some viewed Financial Freedom’s products as usurious, IndyMac’s CEO, Michael Perry, saw the potential for growth. “The acquisition of Financial Freedom makes us the largest provider of reverse mortgages in the US and illustrates our strategy of growing market share through niche products that complement our core competency as a single-family mortgage lender,” he said in announcing the purchase. In addition, Perry had found a new market to tap. “With the maturing baby boom generation and the appreciation of home prices, the reverse mortgage market has the potential for very healthy growth in the years to come.”3
Financial Freedom’s reverse mortgage business took off. According to IndyMac’s securities filings, it made $893 million in reverse mortgage loans in the second half of 2004, $2.9 billion in 2005, and more than $5 billion in 2006.4 Its CEO said it controlled more than half of all reverse mortgages in America. By 2008, it had a portfolio of 160,000 reverse mortgage loans valued at $20 billion.5 The financial press treated Perry like a boy wonder. In one profile, he was pictured behind his desk with a goofy smile, his shoes on his desk with the soles of his wing tips facing the camera, giving a double thumbs-up.6 His final five-year contract, signed in September 2006, primarily rewarded Perry for growing the company. Although his base salary was $1.2 million a year, he could earn close to $9 million if he hit certain growth targets, encouraging him to sell, sell, sell. It didn’t matter how. It didn’t matter to whom.
The company’s board, like the rest of the financial sector, saw nothing wrong with such incentives. “In addition to achieving stellar financial performance, Mike Perry conducts himself with the highest levels of ethics,” IndyMac board member John Seymour, a former US senator from California, said as he announced the contract.7
But IndyMac’s specular growth was a house of cards. Its focus on sales, which was replicated throughout the lending industry, was the foundation not for middle-class prosperity but for economic disaster.
LIKE MOST BANKS during the boom, IndyMac didn’t keep most of the loans it originated. It bundled them into what were known as mortgage-backed securities, which were then sold off to investors. This meant that, institutionally, the bank didn’t really care if the loans it originated were good or bad, or even whether they would be paid back—that would be an issue for those who purchased the bundles.
All of this upended the historical calculus of banking that we learn in elementary school: where banks made money by charging borrowers interest, which in the case of homeowners was paid back month after month as part of his or her mortgage payment. A $100,000, thirty-year fixed-rate mortgage lent out at 5 percent would generate $92,000 in interest over the life of the loan, or nearly double the amount lent. Working families got to own their own patch of land, and banks made money—so long as both behaved responsibly and neither got greedy. Many banks were community institutions where loan officers knew their customers. At IndyMac, that virtuous circle was broken. All the interest charged on the home loan was being captured by the distant owners of mortgage-backed securities. Banks such as IndyMac had essentially become salesmen, reliant on fees they charged for each mortgage at the moment of origination and sale to the securities market. The investors who bought those securities were told they were buying bundles of loans that would generate steady returns over time, but, institutionally, the IndyMac salesmen didn’t really care. The more mortgages they sold, the more money they made, plain and simple.
Given that the old model made a lot of financial sense—after all, banks were able to dependably double their money over time—it might seem odd that IndyMac would want to sell these loans to someone else. But returns that accrued over decades were of no interest to Perry and his supporters. What mattered were profits right now. Others could worry about the fate of the homeowners.
Think about the 1946 Frank Capra holiday classic It’s a Wonderful Life and how it might have been different had it been made about IndyMac. The film stars Jimmy Stewart as George Bailey, whose family-owned savings institution is coveted by the villainous Mr. Potter (Lionel Barrymore), a much wealthier man who sits on the bank’s board of directors. Early in the film, the Jimmy Stewart character tears into Mr. Potter for criticizing a home loan Bailey made to his friend, taxi driver Ernie Bishop, whom Potter dismisses as “discontented lazy rabble.”
Bailey tells Potter and the bank’s other board members that the townsfolk in Bedford Falls work hard and deserve to own their own homes. Yes, he says, he has “all the papers” proving that the borrower has the means to repay the loans. But for him, being a banker wasn’t primarily about making money. Lending money to potential homeowners was also a fundamentally moral endeavor. “Doesn’t it make them better citizens? Doesn’t it make them better customers?” he asks rhetorically. “Just remember this, Mr. Potter, that this rabble you’re talking about, they do most of the working and paying and living and dying in this community. Well, is it too much for them to work and live and die in a couple of decent rooms and a bath?”8
At IndyMac, however, Bailey would have given an entirely different speech. He would have told Mr. Potter that the company’s loan to Ernie Bishop wasn’t a long-term bet on the health of a community but a short-term way to make a quick buck. In this twenty-first-century version of the film, Bailey might have bragged that he’d charged the taxi driver hefty origination fees, and that approving the loan had helped him exceed his sales targets. He would have told Mr. Potter that the loan, like the rest of the mortgages he’d issued in Bedford Falls, were already off the bank’s books, sold in bulk to someone else—perhaps a foreign billionaire or a teachers’ pension fund in California. But it didn’t really matter who, he would tell Mr. Potter, because George Bailey and the bank were making money on fees. One can only imagine that Mr. Potter, obsessed with profits to the exclusion of all else, would have quickly agreed that young Bailey was on to something good.
That’s how IndyMac operated. Along with reverse mortgages, one of the bank’s specialties was the Alt-A mortgage, nicknamed “liar loans” and “ninja loans” (no income, no job, no assets) by critics, because many borrowers lied about their income, and the bank didn’t check. The point was to make the loan. Period.
Adjustable-rate mortgages, which often included hefty balloon payments, where borrowers were required to pay off most or all of the loan at once, represented three-quarters of the loans IndyMac made between 2004 and 2006.9 Another specialty was loans with no down payment, where the home buyer would simultaneously take out two loans from IndyMac, one for 80 percent and another for the remaining 20 percent.
More than a third of IndyMac’s loans were interest only, meaning the borrower was allowed to make a “minimum payment” covering only a portion of the interest on a mortgage. Like a high-interest credit card, the amount of money the borrower owed would grow larger each month, so even as the mortgage holder made payments, the house would not be paid off. If the taxi driver in It’s a Wonderful Life had received this loan, he would never have been able to own his home free and clear. At IndyMac, salesmen told borrowers that this was no problem. After all, they could always refinance into a new loan later—because the value of their property was sure to go up.
An investor in Bedford Falls would quickly know if the houses George Bailey built were worth more than their mortgage, but the international investors who snapped up tranches of IndyMac’s mortgage-backed securities frequently knew nothing about the assets or even the basic economics of the US mortgage market. (Tranche is a French word meaning “slice.”) “The whole securitization process depended on the greater fool theory—that there were fools who could be sold the toxic mortgages and the dangerous pieces of paper that were based on them,” Nobel Prize–winning economist Joseph Stiglitz explained in his 2010 book Freefall: America’s Free Markets, and the Sinking of the World Economy. “Globalization had opened up a whole world of fools.”10
FARAWAY BUYERS THOUGHT they were making a good investment on IndyMac’s mortgage-backed securities, because the institutions who were supposed to vet them for quality told them they were likely to make money when the bonds were paid back with interest. But the bond rating agencies, which were supposed to provide a check on IndyMac’s lending by inspecting its mortgage-backed securities, blindly gave their stamp of approval to bundles of junk. In April 2006, for example, one of the leading rating agencies, Moody’s, examined a $374 million package of IndyMac’s Alt-A mortgages— liar loans—and rated the entire bundle AAA,11 “judged to be the highest quality, with minimal risk.”12 Like the rest of the industry, the incentives for these rating agencies were all wrong. The bond raters were paid by fees from banks. If Moody’s and the others downgraded IndyMac’s securities, they could have lost business.
All of that was great for Michael Perry—until suddenly it wasn’t. Borrowers began suing IndyMac, claiming they were tricked into predatory financial products they did not want or, even more seriously, that their loan documents had been falsified. According to one shareholder lawsuit filed in March 2007, a former fraud investigator at the thrift said employees had taken to calling poorly documented loans “Disneyland loans”—a reference to a mortgage issued to a Magic Kingdom cashier whose application claimed an income of $90,000 a year, “a proposition that, on its face, belies logic and common sense.” Another witness in the case, a former vice president at the bank, said that Perry and other top managers focused on increasing loan volume “at all costs,” and put pressure on subordinates to disregard company policies and simply “push loans through.” A third ex-employee quoted in the suit claimed that Perry told him “business guys rule . . . fuck you compliance guys.” It was “production and nothing else,” he said.13
IndyMac contested the complaints brought by its borrowers and shareholders and dismissed employees’ statements as a mishmash of hearsay and speculation, “long on words and short on substance” and “full of meaningless filler.” But the writing was on the wall. With real estate prices slipping, the company could no longer sell its mortgage-backed securities and was forced to hold on to its bad loans. IndyMac turned a $343 million profit in 2006 but lost $509 million in the final three months of 2007 alone.14
Though the company told shareholders it was poised to return to profitability, officials in Washington had finally begun to take notice. At a March 2008 meeting of federal banking regulators, Sheila Bair, the chair of the Federal Deposit Insurance Corporation (FDIC), the government agency that backs up consumer deposits, shared an internal staff analysis predicting that IndyMac would fail by the end of the year. It crashed even faster, before anyone was punished.15