All the Devils Are Here [80]
“Ameriquest” came the reply. “I’m in the mortgage business.”
Incredibly, the subprime mortgage business, which had been left for dead, had come roaring back, bigger than ever. Never mind that most of the mortgage originators during the first subprime bubble—subprime one, let’s call it—had gone bust, or that giving mortgages to shaky borrowers had led to a rather unsurprising rise in foreclosures. And never mind that the subprime financial model had been very nearly discredited. “Subprime one,” says Josh Rosner, “was the petri dish.”
The second subprime bubble was as wild as anything ever seen in American business. During subprime two, kids just out of school—sometimes high school—became loan officers, some of them pulling down $30,000 or $40,000 a month. (Slickdaddy G told Bob that in one especially good month he took home $125,000.) In some places, like Ameriquest’s Sacramento offices, where Bob had taken a job in 2005, drug usage was an open secret, former loan officers say, especially coke and meth, so that the loan officers could sell fourteen hours a day. And the money poured in.
It wasn’t just Ameriquest, either. In 2006, at a Washington Mutual retreat for top performers in Maui, employees performed a rap skit called “I Like Big Bucks.” To the tune of “Baby’s Got Back,” the crew rapped:
I like big bucks and I cannot lie
You mortgage brothers can’t deny
That when the dough rolls in like you’re printin’ your own cash
And you gotta make a splash
You just spends
Like it never ends
’Cuz you gotta have that big new Benz.
What triggered subprime two—besides some very short memories—was Alan Greenspan’s decision to push interest rates down to near historic lows during the first few years of the new century to keep the economy from faltering. (He was reacting to the bursting of the Internet bubble.) Low interest rates drove down mortgage rates, making home purchases more attractive while driving up investor demand for yield. And despite the rampant lending abuses that characterized subprime one, the government continued to smile on the subprime phenomenon because of its supposed benefit in helping more Americans buy homes. Naturally, Greenspan held this view. “Where once more marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk accordingly,” he said in April 2005.
But there was another factor as well. Piece by piece, over the course of nearly two decades, a giant money machine had been assembled that depended on subprime mortgages as its raw material. Wall Street needed subprime mortgages that it could package into securitized bonds. And investors around the world wanted Wall Street’s mortgage products because they offered high yields in a low-yield environment. Merrill Lynch, Morgan Stanley, UBS, Deutsche Bank, even Goldman Sachs, which had stayed away from subprime one (too small-fry), moved heavily into the business. By 2005, the securities industry derived $5.16 billion in revenue from underwriting bonds backed by mortgages and related assets, Fox-Pitt Kelton analyst David Trone told Bloomberg. That accounted for a staggering 25 percent of all bond underwriting revenue.
Mortgage originators sought to supply the riskier mortgages Wall Street craved—no matter what. The fraud that took place during subprime one paled in comparison to what happened during subprime two. Even borrowers who qualified for a traditional mortgage might be pushed toward a high-fee, high-interest-rate subprime product. And “nontraditional” mortgages—meaning those that were more lucrative for lenders than the old thirty-year fixed-rate mortgage—held by prime borrowers became a whole new category: Alt-A mortgages, they were called.
Nor did every prime borrower need to be pushed. As subprime two moved into bubble territory, more and more people wanted so-called