All the Devils Are Here [81]
The actual purchase of new homes was only part of what drove this new bubble. As Rosner had begun to suspect, millions of Americans were using subprime mortgages to profit from the rise in the value of homes they already owned. A big chunk of Ameriquest’s business, for instance, was something called cash-out refinancings, meaning that borrowers refinanced their mortgages based on the increased value of their homes and pulled out the excess cash for spending. By February 2004, fully two-thirds of the loans made by New Century, another huge subprime lender, were cash-out refis. From 2001 to 2006, more than half the subprime originations and more than one-third of all Alt-A loans were used for refinancings, according to Jason Thomas, a former economist at the National Economic Council who is now at the George Washington University finance department. According to the Wall Street Journal, total household debt in America doubled, from $7 trillion to $14 trillion, between 2000 and 2007. Debt related to housing was responsible for 80 percent of that increase.
And of course housing prices themselves were going through the roof, which both enabled and exacerbated everything else. Since 1940, according to data compiled by the S&P/Case-Shiller home price index, the average home increased in value by 0.7 percent a year. But between 2001 and 2006, fourteen of the twenty largest metropolitan areas in the country saw home values rise by more than 10 percent a year. Median home prices in hot areas like Phoenix and Las Vegas increased by an inflation-adjusted 80 percent. The ratio of home prices to income, which had hovered between 2 and 4 since the Great Depression, shot up in some places to as high as 12, according to data collected by the financial blogger Paul Kedrosky.
During subprime one, the new subprime companies had been marginal players in an enormous housing industry. In subprime two, the subprime companies dominated the industry. Washington Mutual turned itself into the biggest thrift in the country by moving aggressively into the riskiest forms of subprime lending. New Century and Option One, bit players during subprime one, became multibillion-dollar companies.
And then there was Ameriquest. . . .
In April 1996, Roland Arnall moved out of the house he shared with his wife of thirty-seven years, Miriam Sally Arnall. During their divorce proceedings, he told her that because “things were not going that well with his business,” her “financial future would be uncertain” unless she settled quickly, she later alleged in a court filing. (“Please do not consider this any kind of threat,” Arnall’s lawyer told her in a letter.) In the divorce, which was finalized in April 1998, she got $11 million, tax free, and their homes in Los Angeles and Palm Springs. Arnall also paid her legal fees. He, in turn, got full control of his brand-new company, Ameriquest Capital Corporation, or ACC.
As it turns out, Arnall’s financial future was spectacular. In the spring of 1997, before the divorce was concluded, Arnall had spun off a division of Long Beach in an initial public offering. Arnall’s name was mentioned only once in the offering documents, as the owner of 69.9 percent of the parent company. His company sold all of its shares to outside investors, reaping a little over $120 million in the process. A few years later, the new publicly held Long Beach was sold to Washington Mutual, marking the thrift’s entrée into subprime lending. By then, however, Arnall was already in the process of creating a new subprime empire, under the umbrella of ACC. His most promising new venture was Ameriquest.
ACC became a holding company