A Subprime Life

July 5, 2010

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1. A SUBPRIME LIFE

THE SHADOW INVENTORIES OF SAN FRANCISCO
A microcosm of the current economic collapse goes by the name Lembi.

The surname belongs to a San Francisco family that binged on residential real estate for five years and has now become a cautionary tale. “The story of the Lembis…could be seen as emblematic of the real estate boom in general,” reported Richard Parks for the San Francisco Panorama. “They took extreme measures to ensure returns on their highly leveraged investments. … At their peak, various Lembi-owned LLCs controlled more than 300 apartment buildings and 8,200 units in the city.”

The family, caught in the midst of its gorge and now barfing what they call a “shadow inventory” of depreciated buildings back into a depressed market, is illustrative of the world we find ourselves in. In cities across the US, these shadow inventories sit vacant, empty of the families they were intended for.

But there’s a group of citizens who specialize in trying to right these myriad wrongs, to turn rightside up this capsized housing market. They’re called housing counselors. My wife is one.

They have a lot less power than you would hope.

ROCK, HARD PLACE, ET AL

When amid the saturation of warm rain and thick noise I started a column and called it The Built Environment, I had no idea my wife, Allison (Al for short), would be working to restore that very thing: Chicago’s built environment.

Most people have never heard of housing counselors. We hadn’t. Here’s what her official job description might look like:

• Conduct one-on-one meetings with clients to determine current financial situation and to educate on future housing options;
• Follow-up with clients to encourage consistent responsible financial budgeting;
• Compile and submit appropriate documentation to lenders;
• Negotiate workout plans with lenders;
• Keep up-to-date, detailed files on clients according to HUD guidelines; and
• Assist with reports to ensure compliance with all grant guidelines.

Here’s a more accurate description:

• Spend majority of work day talking to incompetent peons who can’t actually help the situation;
• Fight for families who will never be able to afford the home they bought;
• Cry occasionally; and
• Meet lots of interesting people who are more aware than you of how hopeless the situation is.

It’s a literal manifestation of the phrase “between a rock and a hard place.” Except we need to cover all avenues of escape: between the rock and the hard place, 4,000 little men caulk every crevice, pack grout into the cracks, and seal it up tight, blocking out the sun and entombing you in a perpetual “in the middleness,” never able to escape the glaring eye of two parties that have nothing against the other, but rather who both share a total ignorance, a misplaced trust, and an inability to see a way forward.

If this sounds overly dramatic, don’t become a housing counselor.

As one lawyer involved in mitigating a foreclosure noted: “…The banks are mostly apathetic, confused, poorly informed, and poorly managed.” He describes it as “a giant warehouse where underlings paid minimum wage simply parrot a written script, crunching numbers in a giant database in which a thousand tubes and wires cross and intersect one another but ultimately lead nowhere.”

This picture would make anyone cringe, but housing counselors are special victims, because they don’t have the leverage of a lawyer—they can’t threaten bankruptcy. Al spends hours upon hours listening to elevator music, hours she doesn’t have because there are always time limits, always deadlines. This country’s poor live in a constant state of utter time management: get these documents to this location by this time.

Unfortunately in the mortgage-refinancing world, by the time you get to this place, the game has changed—new rules, new place, new time. A wild goose chase orchestrated by an entity that has no interest in helping anyone—and no idea where its own chase will ultimately end.

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2. HOW IT HAPPENED: WARRIORS & GIANTS

WARRIORS
My guess is that you are a bit lost.

Few of us know the intricacies of mortgages, loans, real estate, or bankruptcy law. So let’s go back to how this happened. You do want to know, don’t you? Even though it will only produce a lot of rage you don’t know what to do with? Rage with no escape?

You do. Because despite being inept and full of rage, we find comfort in understanding what happened.

It’s why we read the news, isn’t it? Why we think it’s important to know about the Haiti earthquake and the BP oil spill. Even though we can’t do anything with the information, we take it in. We take it all in.

For this, we have to go back quite a ways.

To the time of Vikings actually. Because according to economist/sociologist Thorstein Veblen, Vikings—and others like them—actually provide a clear window into the financial culture of America.

In the second issue of The Point, a philosophy journal published by a group of Social Thought Ph.D. candidates at the University of Chicago, Etay Zwick takes Veblen’s observation and churns out some enlightening thoughts.

First explaining “productive” societies, in which all participants work and are respected for their contributions (i.e. Native Americans or the bushmen of Australia), he goes on to note that the US falls into the other type:

“…‘Barbarian’ societies, in which a single dominant class (usually of warriors) seizes the wealth and produce of others through force or fraud.”

As it turns out—as some of us have always assumed—the men and women on Wall Street—the warrior class of our nation—don’t actually contribute to society, not even in the form of investment capital.

The reality, Zwick says, is this:

“Business elites promote the stock market far more than the stock market promotes economic growth. Today Goldman Sachs and JP Morgan don’t invest in the promise of producing things of use or real value. They invest in the promise of rising asset prices (or in the case of shorting stocks, the promise of falling asset prices).”

If you’re thinking their activities on Wall Street are keeping Main Street alive, think again.

Between 2002 and 2007—a time of significant financial growth—two-thirds of all income gains went to the wealthiest one percent of the population, while our median income has actually been dropping by an average of $2,197 per year since 2000.

What does this warrior class do then? And what happened to get us where we are?

Investment banks realized that there were enormous profits in trading mortgage-backed securities, so, drawing from Zwick again, they invented two high-risk types:

“…Collateralized debt obligations (that pay if high-interest mortgages are repaid) and credit-default swaps (that pay if they aren’t).

“Trading these shadow-financial (i.e. unregulated) securities generated enormous profits. … But selling more subprime mortgage securities required selling more subprime mortgages. So investment banks bought mortgage-lending outfits and themselves offered subprime loans. As inevitable loan defaults started to pile up, the value of collateralized debts fell, and heavily invested banks couldn’t cover the swaps they sold.”

The banks became peddlers of promise—until the whole plan fell out from under them.

GIANTS
That’s the big picture, the story from the bank’s end. And by the way, in case here you’re thinking here that maybe the bankers are getting a raw deal, maybe things are a little too slanted against them, consider the following 2007 email from a Goldman Sachs trader to his girlfriend concerning his work:

“Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble noble and ethical reason for my job ; ) amazing how good I am in convincing myself!!!”

There were some bad guys. But what was it like for the people buying the homes? Why didn’t they say no? Why did they fall for these subprime mortgage deals?

Mostly, it was the fact that banks know we know nothing about these things. We have to trust them. They’re the experts, the giants. When the giants become okay with lying, we don’t really have anyone to turn to.

Wahajat Ali, the lawyer who earlier described the utter incompetence of today’s banks, chronicled his experience trying to save a family’s home in California. In his essay, he describes the tactic from the viewpoint of his client, the homeowner.

“Like many Americans suckered by mortgage deals, the Lipkins were given a ‘stated-income loan’ with an ‘adjustable interest rate.’

“This nifty trick allowed brokers and their agents to encourage borrowers to essentially make up any income for themselves. … When asked what would happen if the interest rate ‘adjusted’ and the payments increased, borrowers like the Lipkins were told, ‘Oh, don’t worry, by that time your property will have significantly appreciated. You can always refinance the loan and take money from the growing equity.’”

The Lipkins tried to ask questions. They tried to unmask the scam.

But this was no shady, backstreet broker; they were talking to Wells Fargo, one of the biggest names in the financial world. When they were told a “negotiator” was working their modification, to keep them in their home, Ali had to explain that there was no negotiator—it was just a stalling tactic.

“They were flabbergasted that Well Fargo would lie to them. But Wells Fargo is a real piece of work. The Obama administration recently blasted the bank by name. … The L.A. Times broke the news that one of Wells Fargo’s senior vice presidents responsible for overseeing foreclosed commercial properties kept a swanky $12 million foreclosed Malibu property off the market so that he could use it as a weekend getaway.”

But this came out after the fact. At the time, Wells Fargo seemed like one of the best options for a mortgage loan. And the reasoning made sense. If the interest rate goes up, refinance with the house’s equity. A home always appreciates.

It’s too bad then that as the market crumbled under the weight of all the defaults, the Lipkin’s home depreciated to less than half of what it had been appraised at—$585,000 to $270,000 in three years.

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3. WHAT IT LOOKS LIKE: BATTLES, SECRET AGENTS, INSIDERS

So what can housing counselors, the government, the (cooperative) banks, and families do now? What does cleaning up this mess look like?


BATTLES

It looks like a lot of daily battles.

Al gets on the phone to negotiate a loan modification for a client. It looks only somewhat like real negotiation, because as I said earlier, she doesn’t have clout.

She has knowledge, persistence, and (hopefully) all the family’s paperwork. She’s still reliant on a bank’s willingness to work with its clients and being able to do so efficiently, so victories are small and few and far between.

But after pages of faxes, hours of phone calls, and a gallons of sweat and tears—it gets hot in that sealed-up rock-and-hard-place—sometimes a client will get a permanent modification: the bank will refinance to lower payments the family can afford, and the family can stay in the home.

Three cheers for Al! Crack the champagne!

Cork it. Look at the newspaper. “FAILED OBAMA MORTGAGE RESCUE PLAN THREATENS SPIKE IN FORECLOSURES.” Check your email, hear that a family’s modification was rejected. Hear that the recipients of a new grant program already know it’s not going to work.

Resume the battle.


SECRET AGENTS

It looks dire. But it also looks hilarious. And fascinating. The experience of a lifetime.

She’ll look back and laugh about how she got to be on a conference call with the US Treasury and hear them tell the indignant director of a bullying organization to shut up. No one likes his organization. They take a billion clients, take a certain amount of federal funding per head, and then ditch ’em like bad dates.

It looks like a bazaar. Eccentric enough to accommodate people like Marz. Marz works for a housing organization in Oak Park, the suburb just west of Chicago. He may or may not be an improv actor and stand-up comedian in his off time. He may or may not have founded a Black troupe called Pimprov. He may or may not videos of all this on Facebook.

This may or may not explain a great deal.

People like Marz are like secret agents who drop canisters of fresh air in through secret holes in Al’s rock-and-hard-place.

At one meeting, Al, Marz, and Martin (a colleague of Marz’s) sat next to each other. You can imagine trying to discuss new programs and grant funding with the founder of a group called Pimprov.

At some point though, they do have a job to do. They get serious. Al reaches into her purse to get a pen. She pulls out a Madlibs pencil.

Marz looks at her.

Al says, “Anybody got a pen I can borrow?”

It looks like all sorts of such shenanigans. Meeting up with colleagues at trainings and sharing stories while hoarding muffins during mid-morning breaks.

It looks like Al asking Marz if they’re hiring people for a new grant program. “Um, we got a list of volunteers. From you guys.” Al groans. The ‘volunteers’ are the Put Illinois To Work people—an initiative where people work for companies but are paid with federal stimulus money.

The whole thing’s been chaos since it started. Yet another horribly planned government program. And now in a last-ditch effort to find takers for these unskilled, uneducated workers, they send them over to Marz and his crew.

“Oh, Lord.”

This is a new and now oft-uttered phrase of Al’s.

INSIDERS
It looks like a collection of stories that could fill a thousand episodes of Wait Wait… Don’t Tell Me!. The tales of the insiders, people who’ve worked in banks or brokerages, are the best.

Martin’s an insider. He used to work for a brokerage (the people who dole out mortgages) and lasted two months.

They had him cold-calling seniors. Al asked him how they got the list—he said his boss bought it off some insurance guy. If they managed to snare one, they really didn’t need much paperwork from the elderly individual. Martin said they have teams of people with design software who can create anything they need: W2s, tax returns, proof of income, anything.

Wahajat Ali, the lawyer who wrote about his David moment against Wells Fargo’s Goliath, had an insider’s story from a friend’s girlfriend, who “told him her bank had issued an internal policy notice explaining that they would only delay foreclosures if an attorney threatened to file a lawsuit or a bankruptcy petition.”

When insiders confirm the horrors you’ve only heard about, you hope more of them join the ranks of the secret agents, because in battle, you can use all the friends you’ve got.

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EPILOGUE: MOTHER & DAUGHTER

Al’s work as a housing counselor became a lot more complex when her boss pulled her aside and asked her to help her mitigate her own foreclosure.

Things have really taken a turn for the worse when a senior housing coordinator is mired in the troubles her division is designed to combat. But she needed someone besides herself to handle the modification process, so she asked Allison.

Please try and grasp the intricacy of the situation Al suddenly found herself in. She’s between the rock and the hard place and now one of those is her boss.

She inches a little closer to the rock.

But Al worked hard on the case. She felt pressure to succeed obviously, but more than a fear of failure, she feared her boss losing her home.

This is Al’s style, and it’s why, even though it’s tough, she’s pretty good at what she does. She genuinely cares about people and their situations. She’ll follow up with people to see how meetings went and inquire how their business is doing. She’s good with people.

So when it was announced, after months of work, that her boss had received a trial modification, which means lower loan payments and no foreclosure date, it was time to rejoice in a big way.

Things weren’t perfect. It’s not as if clients’ financial situations are immediately and magically cleared up just because the loan is refinanced.

But it was a victory.

A big one.

Suddenly, things at work seemed lighter. Her boss had a huge weight lifted off her shoulders, and theirs being a two-person department, the whole division had a lot less to worry about.

At some point during the emails and phone calls and faxes, her boss’s mother had also contacted Allison. She was in danger of foreclosure too. She wanted to know if Al could help. Her boss’s mom lived in Maryland.

But Al took the case.

Now the mother is in a trial modification too, and things are looking up for two generations of women who months ago were facing the prospect of losing their homes.

Al squints into the darkness of her rock-and-hard-place. All around her little cracks have begun to form, the grout giving way to let in a little light.

Ah.

Sun. Fresh air. Water. She can see that rare thing: hope.

And also, there in the distance, 4,000 little men with caulking guns coming to make some repairs.

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