Down the Up Escalator

by Barbara Garson

  “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.

  III: OUR SAVINGS

  Chapter Twelve

  THREE INVESTORS

  I began this book by contacting people who’d suffered recession-related losses. We’ve already met people who lost jobs and houses. We’re about to meet people who saw their investments drop by as much as half in the first few months of the recession.

  That had to be terrifying, especially to a generation that had been encouraged by government tax exemptions to turn what they thought of as retirement savings over to investment brokers. But unlike those who lost jobs and homes, many investors have caught up or even come out ahead—at least temporarily.

  The investors I’m about to introduce you to are nice people. The hard-nosed, big-time Wall Street guys depicted in books and movies don’t have time to waste with me.

  Yet nice and small as my investors are, they helped me understand how piles of money can exert pressure that leads to financial crazes as stupid as the subprime mortgage mania.

  “Am I Sitting Here Watching My Blood Dribble Out?”

  Henrietta Center is a bossy old woman. “Where’s your helmet?!” are the first words she ever said to me.

  I was locking my bike in front of her apartment complex. I often go there to visit a friend, and Henrietta remembered seeing me arrive helmeted in the past. I explained that I’d been in a rush when I left and couldn’t find it.

  “When do you think you crack your skull open?” she asked. “When you’re rushing.”

  I had to admit she was right. From then on we exchanged a few words whenever I saw her sitting outside. She sometimes let me help her into the elevator with her shopping wagon. “Not that I need help—yet. But I’ll get there.”

  Henrietta, still tall and erect in her late eighties, always had advice for me. When she saw a cake box in my bicycle basket, she said, “Their stuff is overpriced; they sell it half off after four.” When she saw that I’d let my hair go white, she said, “What do you want to look like me for?” She even had advice for me to convey to the friend I visited—presumptuous but astute advice about a man she had recently started dating.

  Then, one day, soon after the crash, I saw her at the mailboxes, and instead of assaulting me with advice, she let me walk her to her door and asked me in.

  “Could you please stay while I open this?” she said. The word “please” coming from Henrietta was a piteous surrender.

  I sat where she pointed while she opened an extra-wide envelope and scanned its contents.

  “Do I look like someone who just lost $80,000?” she said, passing over her brokerage statement. Henrietta’s bottom line had gone down year to date by almost 40 percent.

  It had been going down since “the Lehman Brothers thing,” she told me. She’d called “the people that have my IRA”—she didn’t know the name of anyone at the brokerage house—and reached someone who told her not to panic. She showed the statement to a nephew and heir whom she trusted in these matters, and he confirmed that the investments were basically sound and advised her to wait it out.

  “But they don’t remember the Depression,” she said. “My nephew says it’s different now, but he didn’t live through it.”

  Later I learned that Henrietta had been set to go to college (not so common for a girl in the 1930s) until her father “lost everything” in the Depression. Instead, she went to work straight out of high school and held a series of increasingly responsible jobs with small firms in New York’s flower district.

  Fifty-five years later, still single, she retired on her Social Security and a small pension. These cover her modest living expenses. “The account” (her IRA) was inviolably set aside for home care. She even knew whom she would hire when the time came.

  A Nepalese woman had nursed her after an earlier operation, and they hit it off. Since then, Henrietta has found the woman a lot of clients who paid her more than what she would take home through an agency.

  “She calls me her manager,” Henrietta said, almost cheerful for a moment. “She’ll quit any other job to work for me when the time comes.” Then she remembered. “But she can’t work for nothing. What if this”—she held up the brokerage statement—“what if it keeps going down?”

  Henrietta asked me several times what would happen, what should she do? She was almost viscerally pulled in two directions. On one hand, maybe things were different. She didn’t want to be “an ignorant old woman who pulls my money out in a panic.” But she also didn’t want to be “a gullible old woman who listened to the crap some thirty-year-old kid tells the small-timers.”

  When her fear subsided for a moment, her mind would turn to the general situation. She’d heard on CNBC, she said, that $2 trillion or $22 trillion or maybe it was $200 trillion had already been wiped out in the crisis. “But what happens to all the stuff we could have bought with that money?” A profound question.

  Then she’d remember her personal situation again, and I could almost feel her stomach drop and see the weakness spread into her limbs. “They tell me it’s different today, things are insured, the worst thing you can do is panic. So, okay, it’s not jump-out-the-window time. But just look”—she gestures again to her bottom line—“if this goes down by another 40 percent, what will happen to me? Am I sitting here watching my blood dribble out?”

  Millions of other retirees found their portfolios falling rapidly too. Like Henrietta, many people with individual retirement accounts and 401(k)s had simply checked off boxes on forms they got through their employers. Under the management of brokerage firms that they hadn’t chosen, their money grew far more than it would have if they had put it into insured bank accounts. Yet they seemed to have only the vaguest understanding that they were not savers or old-fashioned pensioners but investors. During the week of the crash I met a man on a bus who reminded
the people around him about 1930s movies where “a guy in a top hat grabs the telephone mouthpiece and yells, ‘Sell! Sell!’ But I don’t know who to call!” I imagine he eventually reached someone who advised him not to panic.

  Of course many professionals representing banks, insurance companies, corporations, pension funds, and really wealthy individuals (that is, the investors who control the overwhelming bulk of securities) must have ignored such advice, or the markets wouldn’t have plunged. But millions of others stood paralyzed like the proverbial deer in the headlights while their portfolio wealth declined 30 to 50 percent.

  I’m going to leave Henrietta frozen like that for a while and talk to a couple of other modest investors in their later years.

  “If You Give It Away, You Don’t Have It”

  An author I know heard that I was interviewing recession victims. She herself had been helped over a rough period by a blue-blooded and generous woman who now might qualify as a victim.

  My writer acquaintance had been living in the suburbs when her husband suddenly died, leaving a messy will. His children by an earlier marriage claimed the house; they even had the electricity turned off. Perhaps the author had some legal recourse, but this wasn’t the time in her life for a draining battle. She’d just gotten a book contract and wanted to get on with it.

  At that moment Prudence invited the writer to move to her Manhattan apartment, explaining the modest rent by saying that they would “share” the place until Prudence sold it. But Prudence made only occasional trips to Manhattan from her Massachusetts home. Not only that, but at the height of the real estate boom Prudence postponed selling the apartment for the full two years that it took the writer to finish her book. Then, and then only, did she put the place on the market. Fortunately, it sold within a week because the housing bubble was already quietly deflating.