Taub other peoples houses; how decades of bailouts, captive regulators, and toxic bankers made home mortgages a thrilling business (2014)

OTHER P EOPLE’S HOUSES OTHER PEOPLE’S HOUSES How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business JENNIFER TAUB Published with assistance from the foundation established in memory of James Wesley Cooper of the Class of 1865, Yale College Copyright © 2014 by Jennifer Taub All rights reserved This book may not be reproduced, in whole or in part, including illustrations, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S Copyright Law and except by reviewers for the public press), without written permission from the publishers Yale University Press books may be purchased in quantity for educational, business, or promotional use For information, please e-mail sales.press@yale.edu (U.S office) or sales@yaleup.co.uk (U.K office) Designed by James J Johnson Set in Miller type by Westchester Publishing Services Printed in the United States of America Library of Congress Cataloging-in-Publication Data Taub, Jennifer Other people’s houses : how decades of bailouts, captive regulators, and toxic bankers made home mortgages a thrilling business / Jennifer Taub pages cm Includes bibliographical references and index ISBN 978-0-300-16898-3 (cloth : alk paper) Savings and Loan Bailout, 1989–1995 Savings and loan association failures—Economic aspects—United States Mortgage loans—United States Banks and banking—United States—History Financial crises—United States—History I Title HG2151.T38 2014 332.7′20973—dc23 2013044531 A catalogue record for this book is available from the British Library This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper) 10 For Michael The goose that lays golden eggs has been considered a most valuable possession But even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose The investment bankers and their associates now enjoy that privilege They control the people through the people’s own money —LOUIS D BRANDEIS, Other People’s Money and How the Bankers Use It (1914) CONTENTS Introduction: Lost Ground PART I HIGHFLIERS Chapter The Nobelmans Chapter The Condo King and His Empire Chapter The Run on American Savings and Loan Chapter The Saturday Night Massacre Chapter Deregulation Inauguration Chapter The Red Baron of Finance Chapter The Bailout Chapter Friends of the Court PART II REPEAT PERFORMANCE Chapter Friend of the Family Chapter 10 The Factory Line Chapter 11 The Bubble Chapter 12 First to Fall Chapter 13 Surf and Turf Chapter 14 Legal Enablers of the Toxic Chain Chapter 15 The Great Betrayal PART III MYTH CONFRONTS REALITY Chapter 16 Dispelling Myths about the Crisis Epilogue: Cast Again Notes Acknowledgments Index OTHER P EOPLE’S HOUSES INTRODUCTION LOST GROUND Katherine Copeland swept out the living quarters of her family’s 1,280-acre wheat and cotton farm in Chattanooga, Oklahoma Believing a foreclosure was imminent, she apparently wanted to get things in order She gathered refuse from drawers and cabinets, making a pile outside When this work was completed, Katherine set the pile on fire Then she climbed onto the burning heap and asphyxiated in the smoke Her husband, Eugene, found her body there later that day In the note she left on the dinner table, Katherine blamed herself for the expected loss of the land that her family had farmed since 1910 and that she had hoped to pass on to her children.1 Copeland’s suicide gained national attention that summer of 1986 because it was not an isolated incident Her desperate act echoed the suffering of many during the farm crisis Due to a 1970s agricultural export boom, crop prices and thus farm incomes shot up, so farmers, encouraged by the government and private lenders, borrowed money to expand operations Farmland prices rose Lenders loosened underwriting standards, extending loans excessively, with the exuberant forecast that commodity prices and thus income and land values would keep rising The banks calculated that if borrowers defaulted, the land would be good collateral to seize and sell.2 Then came the embargo on grain sales to the Soviet Union When prices for grain and other commodities fell, farmland values also declined, leaving many borrowers underwater, with debt greater than their property was worth Around the same time, to tame inflation, the Federal Reserve tightened the money supply and allowed interest rates to skyrocket Rates peaked above 20 percent, and farmers with variable-rate loans saw their monthly payments spike, making it impossible for many to service their debt In December 1985, the Farmers Home Administration began sending out notices of foreclosure to one-fifth of all farms in Oklahoma But with the crash in farmland values, foreclosure was a lose-lose proposition for borrowers and lenders Without land, farmers had little prospect of earning a living or paying back the loans, and the repossessed land’s value did not cover what was owed The wave of farm failures was followed by a wave of farm bank failures.3 The U.S Congress responded in November 1986 with an amendment to the Bankruptcy Code that empowered courts to help families save their farms They could emerge from bankruptcy with a fresh start, able to continue both commercial and family life with manageable debt Among other things, this legislation permitted a farm debtor to reduce the outstanding principal on the farm home mortgage, as well as to get a new term length and possibly a lower interest rate The new law gave farmers bargaining power to negotiate modifications even without bankruptcy, as their lenders were aware of the relief the court would provide if they failed to bargain Similarly, for a time, some courts also permitted nonfarm homeowners to use another provision of the Bankruptcy Code to modify underwater mortgages for principal residences However, in 1993, the United States Supreme Court abolished that practice.4 protection, 70; and FSLIC coverage limits, 24; and subprime lending, 147; and thrift competitiveness, 60–61, 136; and toxic mortgage supply chain, 224–225 Deregulation, 59–77; and accounting practices, 66–68; in California, 71–72; under Carter, 60–64; and consumer protection, 70–71; of derivatives, 236; and Federal Home Loan Bank Board, 92– 94; and financial crisis, 277–279; financial industry’s coordination of, 73–76; in Florida, 71–72; and Glass-Steagall Act, 72–73; and moral hazard, 106; under Reagan, 64–66; and S&Ls, 69–70, 76–77, 106; and securitization of mortgages, 68–69; and S&L crisis, 4, 5; in Texas, 22–24, 61– 62, 69, 71–72; and toxic mortgages, 223–228; and toxic mortgage supply chain, 223–245; and Washington Mutual’s expansion, 133 Derivatives transactions, 94, 133, 152, 236, 272 Detroit, Michigan, bankruptcy filing by, 289 DIDMCA See Depository Institutions Deregulation and Monetary Control Act of 1980 Dime Bancorp, 132, 213 Dimon, Jamie: and Bear Stearns acquisition, 204; on financial crisis causes, 283; on JPMorgan Chase’s role, 295–297; and London Whale trading losses, 284–285, 286, 297; on systemic risk of large banks, 301–302; on underwriting practices, 282; and Washington Mutual acquisition, 250, 298–299 Direct investments, 23, 71–72 Discount rate, 52–53 Discriminatory lending, 148 Dochow, Darrel, 102, 106, 202, 215–216, 218, 291 Dodd-Frank Act of 2010, 278, 280, 281, 291, 301 Dole, Bob, 172 Drew, Ina, 286, 297 Drexel Burnham Lambert, 71, 157, 192 Dugan, John, 228 Durbin, Richard, 256 Durbin Amendment, 256–263 Dzivi, Bart, 34, 35–36, 90, 102, 290 eAppraisalIT, 128 Early payment defaults (EPDs), 150 Eckhaus, Steve, 283 Economic Recovery Tax Act of 1981, 65 Eldridge, Carl, 136 Emergency Economic Stabilization Act of 2008, 254 Empire Savings and Loan Association of Mesquite, 17–33; and brokered deposits, 19–21, 27–28, 30; and condominium market in Texas, 32–33; creation of, 18; and deregulation, 22–24; and I-30 condo project, 25–28; and land flips, 24–26; and moral hazard, 21–22 Energy prices, 48 Enron Corporation, 132, 234 EPDs (early payment defaults), 150 European Union, 211, 240 Fannie Mae See Federal National Mortgage Association Farmers Home Administration, 2, 44 FASB (Financial Accounting Standards Board), 234 Faulkner, Danny: and Empire Savings and Loan, 17–19, 207; and I-30 condo project, 25–28; and land flips, 24–25; prison sentence for, 288; prosecution of, 31 Faulkner Point, 18 FCA See Financial Corporation of America Federal Bureau of Investigation (FBI), 30, 271, 277, 296 Federal Deposit Insurance Corporation (FDIC): and American Savings Bank, 89, 123, 132; closure of banks by, 302; culture of, 220–221; establishment of, 92; and IndyMac, 210, 213, 291; OTS’s relationship with, 215–217; and Savings Association Insurance Fund, 103; and Statewide Bank in Covington, 288; and systemic risk, 281; and Washington Mutual, 212, 213, 250, 289–290 Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), 212, 278 Federal Home Loan Bank Act of 1932, 20, 91 Federal Home Loan Bank Board: and brokered deposits, 19–20, 63; creation of, 40; and deregulation, 22–23; and Empire Savings and Loan, 28–29 Federal Home Loan Banks: creation of, 20, 40; and deregulation, 22–23; Freddie Mac ownership by, 43; liquidity support from, 35, 88, 91, 200; S&Ls as owners of, 29 Federal Home Loan Mortgage Corporation (Freddie Mac): amicus curiae brief filed in Nobelman case, 116; bailout of, 250; creation of, 43; and deregulation, 73; and financial crisis, 276; loss reserves at, 201; and secondary mortgage market, 43–44, 68, 74, 145–146, 229; and subprime loans, 182; and underwriting standards, 226; and Washington Mutual, 177–180 Federal Housing Administration (FHA), 41, 44 Federal Housing Finance Agency (FHFA), 286, 294 Federal Housing Finance Board (FHFB), 103 Federal National Mortgage Association (Fannie Mae): amicus curiae brief filed in Nobelman case, 116; bailout of, 250; creation of, 41; and Empire Savings and Loan, 27; and financial crisis, 276; as government-sponsored enterprise, 43; loss reserves at, 201; and secondary mortgage market, 43–44, 68, 74, 145–146, 229; and subprime loans, 182; and underwriting standards, 226; and Washington Mutual, 177–180 Federal Open Market Committee (FOMC), 48–49, 53, 170, 182 Federal Reserve: and AIG, 250; and Bear Stearns, 204; and commercial banking regulations, 40; composition of, 48–49; Consumer Advisory Council, 169; and consumer protection, 227, 266; consumer protection role of, 172–175; and deregulation, 224; and financial crisis, 249; and interest rates, 154, 171; and JPMorgan Chase, 299; liquidity support from, 88; and reserve requirements, 61; and securitization, 231 Federal Reserve Act of 1913, 39 Federal Savings and Loan Insurance Corporation (FSLIC): and American Savings and Loan, 35, 88, 96, 98–99, 105; and brokered deposits, 63; and condominium market in Texas, 33; creation of, 20; and deregulation, 24, 64; and Empire Savings and Loan closure, 31; and moral hazard, 21–22; recapitalization of, 93–94; termination of, 103 Fed funds rate, 53, 55 Feltgen, Cheryl, 184 FHA (Federal Housing Administration), 41, 44 FHFA (Federal Housing Finance Agency), 286, 294 FICO credit scores, 147 Financial Accounting Standards Board (FASB), 234 Financial Corporation of America (FCA): accounting practices at, 86; bankruptcy filing by, 96, 105; growth of, 80–81; as parent of American Savings and Loan, 34; restatement of earnings by, 90– 91; securities fraud lawsuits against, 95 Financial Crises (Wolfson), 168 Financial Crisis Inquiry Commission: on causes of financial crisis, 172–173, 274–275; Greenspan’s testimony before, 269–273; on GSEs, 276; on housing bubble, 169; on mortgage fraud, 130, 239, 277; Reich’s testimony before, 211; report of, 274; on underwriting standards, 227 Financial Crisis of 2008: avoidability of, 279–280; and bailout of AIG, 250; cascading failures in September 2008, 247–250; causes of, 273–283; and Community Reinvestment Act of 1977, 275; and deregulation, 277–279; and failure of Lehman Brothers, 247–248; and fraud, 277; and GSEs, 276; and housing bubble, 274, 279; myths about, 269–283; and the Federal Reserve responsibility, 272–273; and run on money market funds, 248–249; and similarities to Savings and Loan Crisis, 5; and underwriting standards, 279 Financial Instability Hypothesis, 167 Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), 100 Financial Institutions Supervisory Act of 1966, 29 Financial Services Modernization Act of 1999, 211, 231–232 Financial Stability Oversight Council, 292 Financial Times op-ed by Greenspan, 270 Fink, Larry, 76 Finn, Michael, 216 FIRREA (Financial Institutions Reform Recovery and Enforcement Act of 1989), 100 First Charter Financial Corporation, 84 First-payment defaults, 150 First RepublicBank, 104 Fisher, Richard, 300 Fishman, Alan, 246 Fitch (rating agency), 159, 160 Florida: deregulation in, 71–72; housing price declines in, 199 FOMC See Federal Open Market Committee Forbearance plans, 94, 174, 224, 277 Foreclosures: and financial crisis, 282; and housing bubble, 185, 198–199; on Nobelman condo, 15 Frank, Barney, 262 Fraud: FBI investigations of mortgage fraud, 271; and financial crisis, 277; and S&L crisis, 5; and subprime lending, 149; at Washington Mutual, 160–161 Frazier, Raymond, 135 FSLIC See Federal Savings and Loan Insurance Corporation GAAP (Generally Accepted Accounting Principles), 66, 93 Gain on sale, 140–141, 155–156 GAO (General Accounting Office), 92, 259 Garn, Jake, 69 Garn-St Germain Depository Institutions Act of 1982, 69, 70, 83, 125, 225 Garza, Emilio, 115 Geanakoplos, John, 168 Geithner, Timothy: and AIG bailout, 250; and Bear Stearns bailout, 204, 205; career of, 291–292; and mortgage modification programs, 264, 266 General Accounting Office (GAO), 92, 259 General Electric, 178, 249 Generally Accepted Accounting Principles (GAAP), 66, 93 Gerberding, William, 133 GI Bill, 41 Gilleran, James, 220 Ginnie Mae See Government National Mortgage Association Ginsburg, Ruth Bader, 228 Glass, Carter, 135 Glass-Steagall Act See Banking Act of 1933 Glenn, John, 102 Goldman Sachs: and AIG credit default swaps, 192, 196; and CDOs, 158, 186; conversion to bank holding company, 248; and leverage, 240–241; litigation against, 290 Goodman, Joshua, 258 Gordon, Julia, 253 Gott, Marc, 180 Government National Mortgage Association (Ginnie Mae), 44, 74, 85–86, 229 Government-sponsored enterprises (GSEs): establishment of, 43; and financial crisis, 276; and MBSs, 286–287; and underwriting standards, 226 See also Federal Home Loan Mortgage Corporation (Freddie Mac); Federal National Mortgage Association (Fannie Mae) Gramlich, Edward, 227 Gramm-Leach-Bliley Act of 1999, 211, 231–232 Gray, Ed, 30–31, 32, 90, 92–94, 102 Gray, Jonathan, 85, 90, 100, 132, 152 Great Recession See Financial Crisis of 2008 Great Western, 132, 213 Greenberg, Ace, 188 Greenberger, Michael, 238, 272 Greenspan, Alan: and CDSs, 237; on equity capital requirements, 292–293; FCIC testimony of, 269– 273; and Federal Reserve’s consumer protection role, 266; and housing market, 168–172, 183; and interest rates, 142; and Keating, 102–103; on mortgage product innovations, 154; and regulator agency turf battles, 219; and securitization, 231 Group of Thirty, 219 Grout, Julien, 299 GSEs See Government-sponsored enterprises Guarantee fee, 44, 179, 180 Guynn, George, 182 HAMP See Home Affordable Modification Program H&R Block, subprime lending by, 178 Harvard Joint Center for Housing Studies, 128 Hawke, John, 228 Hedge funds, 157, 189 Hedging of interest rate risk, 94, 133, 151–153, 180 Helping Families Save Their Homes Act of 2009, 257, 263 Hoenig, Thomas, 244, 300 HOEPA (Home Ownership and Equity Protection Act of 1994), 172, 226–227 HOLC (Home Owners Loan Corporation), 40–41 Holder, Eric, 300 Home Affordable Modification Program (HAMP), 263–264, 265, 294 Home Ownership and Equity Protection Act of 1994 (HOEPA), 172, 226–227 Home Owners Loan Corporation (HOLC), 40–41 Home Savings, 132, 213 Hoover, Herbert, 39, 255 Housing and Urban Development Department (HUD), 265, 276 Housing bubble, 3, 163–166 Housing market: bubble in, 163–187; expert views on, 165–167; and financial crisis, 274, 279; and New Deal programs, 40; and Option ARMs, 127–130; and Ponzi financing, 167–168 HUD (Housing and Urban Development Department), 265, 276 Hyperion Partners, 100, 104 IKB (German bank), 197–198 Iksil, Bruno, 285, 286, 299 IndyMac, 177, 209–210, 213, 291 Inflation: beneficiaries of, 49–50; Reagan on, 59; and S&Ls, 50–52; victims of, 49–50; Volcker’s plan to tame, 47–48, 51, 52–56 Interest rates: and adjustable-rate mortgages, 125–126, 154; beneficiaries of high rates, 56–57; caps on, 42; hedging of risk, 94, 133, 151–153, 180; and housing bubble, 171; and inflation, 55; and servicing rights, 152 Interstate Banking and Branching Efficiency Act of 1994, 133 Investment banks: leverage at, 159, 240–241; and securitization, 158 See also specific institutions Investment Company Act of 1940, 233 Irrational Exuberance (Shiller), 166 Isaac, William, 20, 89, 92 It’s a Wonderful Life (film), 37–38 Janis, Jay, 63, 64, 65, 125 Jensen, Paul, 26, 31 Joffe-Walt, Chana, 214 Johnson, Lyndon, 43 JPMorgan Chase: Bear Stearns acquired by, 204–205; and CDSs, 192, 237; civil penalties against, 299; enforcement actions against, 296–297; litigation problems for, 286–287, 299; and London Whale trading losses, 284–287; and mortgage modification programs, 264; and securitization, 232; subprime lending by, 178; Washington Mutual acquired by, 250, 286–287, 298–299 Junk bonds, 71, 73, 100, 157, 192 Kaufman, Ted, 265 Keating, Charles H., Jr., 101–103, 192, 216 Keating Five, 101–103 Keynes, John Maynard, 118, 167 Keystone Holdings Partners, L.P., 98, 105, 124 Killinger, Kerry: FDIC suit against, 289–290; firing of, 222–223; and hedging of interest rate risk, 151–153, 286; and higher-risk lending strategy, 153–155, 158, 193–194, 207–208; and housing bubble, 163, 176–177, 183–185; and Option ARMs, 130–131; and subprime lending, 146–148, 150–151; and underwriting standards, 227; as WaMu CEO, 123, 137–139, 140 Klein, Christopher, 289 Knapp, Brooke, 87, 105 Knapp, Charlie: as CEO of American Savings and Loan, 36–37, 78–96, 119, 208; and interest rate gamble, 81–82; loan fraud conviction of, 105; and run on American Savings and Loan, 90–91 Knobel, Steven, 141 Kurland, Stan, 154 Land flips, 24–26, 207, 245 Lannoye, Lee, 139, 141, 148 Las Vegas, Nevada, housing market in, 15 Lehman Brothers: bankruptcy of, 3, 247–248, 301; and leverage, 240–241; subprime lending by, 178 Leverage: at commercial banks, 159; and housing bubble, 168; at investment banks, 159; and moral hazard, 21–22; of synthetic CDOs, 197; and systemic risk, 281; in toxic mortgage supply chain, 239–245; at Washington Mutual, 141 Levin, Carl, 186, 274, 282, 297 Levin-Coburn Report: on causes of financial crisis, 274; on deregulation, 277–278; on mortgage fraud, 277 Levitin, Adam J., 258 Lew, Jack, 292 Lewis, Ken, 209 Lewis, Michael, 67 Liar loans See Stated-income loans Liar’s Poker (Lewis), 67 Lincoln Savings and Loan Association of Irvine, 101–103, 106, 192, 216, 291 Lippmann, Greg, 175–176 Living will provisions, 301 Loan losses: deferral of, 66; reserves for, 83, 84, 87, 201 Loan-to-value ratios, 69 Lombard Street: A Description of the Money Market (Bagehot), 255 London Whale trading losses (JPMorgan Chase), 284–287, 297–298 See also Whale Report Long Beach Financial Corporation, 147 Long Beach Mortgage, 132, 146–150, 160 Long Beach Savings, 103–104 Long-Term Capital Management, 171, 238 Los Angeles, California, housing market in, 15 Louisiana Office of Financial Institutions, 288 Lubben, Stephen, 244 Macey, Jonathan, 252 Madoff, Bernard, 296 Maiden Lane LLC, 205 Mairone, Rebecca, 290 The Map and the Territory (Greenspan), 292–293 Marquette National Bank of Minneapolis v First Omaha Service Corp (1978), 62 Martin, Preston, 84 Martin, William McChesney, 168 Martin-Artajo, Javier, 299 Massachusetts Bankers Association, 295 Mayer, Martin, 106 Mayo, Mike, 216 MBSs See Mortgage-backed securities McCain, John, 102, 247, 253, 297, 301 McCulley, Paul, 166 McKinney, Stewart, 89 MEGAFUND, 137 Mellon, Andrew, 255 Memo of understanding (MOU), 218 Merkley, Jeff, 282 Merrill Lynch: Bank of America’s acquisition of, 248; and Bear Stearns repo funding, 190; and brokered deposits, 19; and CDOs, 158; and leverage, 240–241; subprime lending by, 178 Merrill Lynch Mortgage Capital, 76, 225 Mezzanine tranche securities, 157 Milken, Michael, 71, 157, 192 Miller Condominium Corporation, 13, 104, 105 Minsky, Hyman, 167, 280 Modification of loans: under Bankruptcy Code, 10, 111, 112, 113, 257; and Home Affordable Modification Program (HAMP), 263–264, 265, 294; Nobelmans’ proposal for, 14–15; Supreme Court ruling on, 2–4, 5, 10–11, 115–118, 225 Money market funds, 51, 57–58, 137, 249 Money supply, 54 Montag, Tom, 186 Moody’s, 159 Moral hazard: and bankruptcy reform, 258, 260–261; and Bear Stearns bailout, 206; and corporate bankruptcies, 110; and deregulation, 106; and housing bubble, 171; for S&Ls, 21–22 Moran, Jerry, 301 Morgan Stanley, 240–241, 248 Mortgage-backed securities (MBSs): and American Savings and Loan, 85–86; creation of, 9, 45–46; and deregulation, 73–74; and GSEs, 286–287; rating downgrades of, 190–191; in toxic mortgage supply chain, 229; and underwater mortgages, 3; Washington Mutual’s issuance of, 136, 146 Mortgage Bankers Association of America, 116, 166, 228 Mortgage lending: bankruptcy treatment of, 116; and Fed funds rate, 55; and FHA, 41; regulation of, 103–104; by S&Ls, 37–39 Mortgage Resolution Partners, 295 Moynihan, Brian, 283 Mozilo, Angelo, 154, 176–178, 194, 209, 218 Mudd, Daniel, 178, 180 Murphey Favre, Inc., 137 Murray Financial Corporation, 104; and Murray Investment Company, 13, 14; Murray Mortgage Company, 14, 111, 113; Murray Savings and Loan, 104; and Murray Savings Association, 14 National Association of Realtors, 116, 257 National Bank Act of 1863, 62, 228 National banks, 38–39, 62–63 Nationally Recognized Statistical Rating Organizations, 75, 229 Nationsbanc Mortgage Corporation, 116 Negative amortization, 70, 125, 126–127, 199 New Century Financial, 177, 185 New Deal programs, 39, 135, 223 New West Federal Savings and Loan, 98–99, 118 Nobelman, Harriet and Leonard, 9–16; bankruptcy case of, 9–12, 15, 108–120; condo purchase by, 12–16; health of, 118, 287 Nobelman v American Savings Bank (1993), 5, 108–120, 225, 257 Nocera, Joe, 206 Nolan, Pat, 72 Nolan Act of 1983 (California), 71, 83 NOW (negotiable order of withdrawal) accounts, 57 Obama, Barack: and bankruptcy reform, 247, 251, 252–254, 262–263; and financial crisis bailout, 253; and underwater mortgages, 294 OCC See Office of the Comptroller of the Currency Offer, Charles, 78–79 Office of Federal Housing Enterprise Oversight (OFHEO), 182 Office of Management and Budget, 73 Office of the Comptroller of the Currency (OCC): and Continental Illinois bailout, 89; and JPMorgan Chase, 296, 299; and state regulation, 228; thrift supervision by, 38–39; and Washington Mutual, 217; and Whale Report, 297–298 Office of Thrift Supervision (OTS): and consumer protection, 227; and Countrywide, 218–219; culture of, 220–221; and deregulation, 278; establishment of, 103, 214; FDIC’s relationship with, 215–217; and IndyMac, 209–210; and subprime lending, 148; and Washington Mutual, 133, 192, 201, 209–221 OFHEO (Office of Federal Housing Enterprise Oversight), 182 Oil prices, 48, 52 Oklahoma, farm foreclosures in, Option ARMs: and consumer protection, 70–71; and FDIC suit, 289–290; and GSEs, 178–179, 180; and OTS, 220; in toxic mortgage supply chain, 224–228; Washington Mutual’s use of, 125–127, 129–131, 140, 143–145, 154–155, 160, 173–174, 199 Organization of Petroleum Exporting Countries (OPEC), 48, 52 Origination fees, 82–84 O’Shea, James, 25 OTS See Office of Thrift Supervision Oxford Provident Building Association, 38 Palin, Sarah, 247 Palmer, Philip, 11 Paper-for-paper transactions, 70 Parity Act See Alternative Mortgage Transaction Parity Act of 1982 Parkway Lane Condominium Complex, 13–16, 32–33, 104, 287–288 Parsons, John D., 144 Partee, Charles, 89 Paulson, Henry: and Bear Stearns bailout, 204; and financial crisis bailout, 251, 252, 254–255; financial system reforms proposed by, 219; and GSE loss reserves, 201; principal reduction programs supported by, 253 Paulson, John, 197, 198, 290 Payment options, 126, 129 Pelosi, Nancy, 252 Pension Benefit Guarantee Corporation (PBGC), 110 Pepper, Lou, 133–136, 138, 153, 165, 199–200, 202 Perpetual Savings, 68 Personal loans, 23 Pew Charitable Trusts, 291 Pickard, Lee, 241 Polakoff, Scott, 211, 217, 246 Pooling of mortgage loans, 44–45 See also Mortgage-backed securities (MBSs) Popejoy, William, 91, 94–96, 119, 208 Powell, Donald, 220 Pozen, Robert, 241 Pratt, Richard T., 64, 73, 76, 106, 125, 225 Predatory lending, 148, 150, 227 Prepayment risk, 180 Prime rate, 53–54, 56 Prince, Charles, 159 Prins, Nomi, 282 Private-label securitizations, 146, 229 Private mortgage insurance, 191 Promissory notes, 13–14 Prudential supervision, 168 Pusey, Allen, 25 Ramirez, Tom, 161 Ranieri, Lewis: and American Savings and Loan, 94; and deregulation, 74–76; and Hyperion Partners, 100, 104; and mortgage securitization, 9, 45, 68, 73; principal reduction programs supported by, 253–254; and securitization, 230–231 RAP (Regulatory Accounting Practices), 66–68, 93 Rating agencies, 159–160 Rational expectations theory, 52, 54 Reagan, Ronald: and deregulation, 59–60, 64–66, 74; and Federal Home Loan Bank Board appointments, 93 Real Estate Mortgage Investment Conduits (REMICs), 229–230 Recasting of Option ARMs, 127 Redlining, 275 REFCORP (Resolution Funding Corporation), 101 Refinancing, 143, 176 Regan, Donald T., 60, 65 Regulation Q, 42, 46, 51, 58, 61 Regulatory Accounting Practices (RAP), 66–68, 93 Regulatory capture, 217–218, 291–292 Reich, John: and Countrywide, 209, 210; and IndyMac, 209, 210; and Washington Mutual, 215, 217– 218, 245–246, 249–250 Reid, Harry, 252 REMICs (Real Estate Mortgage Investment Conduits), 229–230 RepublicBank, 13, 104, 105 Repurchase agreements (repos): Bear Stearns’ use of, 189; Financial Corporation of America’s use of, 86, 94; and financial crisis, 249; and toxic mortgage supply chain, 239–240, 242; tri-party repurchase agreements, 242; Washington Mutual’s use of, 135, 141 Reserve Primary Fund, 51, 248–249, 293 Reserve requirements, 52, 54, 61 Resolution Funding Corporation (REFCORP), 101 Resolution Trust Corporation (RTC), 101, 104 Richardson, Sid William, 97 Riegle, Donald, 102 Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, 133 Robert M Bass Group, 97, 99–100, 105, 119, 123, 124 Romer, Paul, 110 Roosevelt, Franklin, 39, 135 Rotella, Steve, 151, 160, 289–290 RTC (Resolution Trust Corporation), 101, 104 Rubin, Robert, 237, 239 Saffer, Greg, 144, 286 St Germain, Fernand, 69 Salomon Brothers, 45, 68, 94, 136 Sanders, Barefoot, 114–115 S&P See Standard & Poor’s S&P/Case-Shiller index, 15 Santelli, Rick, 265 Sarno, Domenic, 295 Saturday Night Massacre (1979), 47–58; and Federal Reserve, 48–49; and inflation, 49–50, 52–54; and interest rates, 56–57; and money market funds, 57–58; and savings and loans, 50–52 Savings and loans (S&Ls), 9–120; bailouts for, 97–107; and deregulation, 22–24, 65–66, 69–70, 76– 77; history of, 37–39; and inflation, 50–52; and interest rates, 56–57; and money market funds, 57–58; net worth requirement for, 69, 101; and New Deal, 39–42; ownership rules for, 66; regulation of, 17–18, 103–104; and Saturday Night Massacre (1979), 47–58; and secondary mortgage market, 42–46 Savings Association Insurance Fund, 103 Schapiro, Mary, 242 Schmitz, Dietrich, 135, 200 Schneider, David, 151, 155–156, 174, 289–290, 299 Schneiderman, Eric, 128 Schroeder, Michael, 11, 14, 16, 108, 113–116, 118–119 Schwartz, Alan, 191, 204 Secondary mortgage market: federal government role in, 42–45; and Washington Mutual, 145–146 See also Government-sponsored enterprises (GSEs); Mortgage-backed securities (MBSs) Secondary Mortgage Market Enhancement Act of 1984 (SMMEA), 74–75, 229, 230 Securities and Exchange Commission (SEC): and Budget Industries, 80; and CDOs, 233; and Financial Corporation of America, 84, 90–91, 95; and hedge funds, 189; and JPMorgan Chase, 299; and leverage, 240, 242; and Reserve Primary Fund, 293 Securitization: and deregulation, 68–69, 73; and financial crisis, 270; history of, 44, 45–46; in toxic mortgage supply chain, 228–233 See also Mortgage-backed securities (MBSs) Seidman, Bill, 106 Senate Permanent Subcommittee on Investigations, 273–274 See also Levin-Coburn Report Senior tranche securities, 157 Servicemen’s Readjustment Act of 1944, 41 Servicing rights, 140–141, 142, 151–152 Shadow banking system, 242–243, 249, 293–294 Shiller, Robert, 166 Sirri, Erik, 241 SMMEA See Secondary Mortgage Market Enhancement Act of 1984 Solow, Robert, 56, 183 South Dakota, deregulation in, 63 Spector, Warren, 191 Stagflation, 55 Standard & Poor’s (S&P), 159, 160, 185, 202 Stated-income loans (liar loans): and bankruptcy reform, 261; foreclosure rates on, 199; and GSEs, 180; Washington Mutual’s use of, 131, 144, 148, 150, 153, 155, 169 State Savings and Loan Association of Stockton, 42, 79, 80–81, 82 Statewide Bank in Covington, 288 Steel, Robert, 201 Stevens, John Paul, 117 Stewart, Rosemary, 32 Stimulus programs, 256 Stockton, California, bankruptcy filing by, 289 Stout, Lynn, 237, 238 Subprime lending: Bear Stearns hedge fund investments in, 189; and financial crisis, 270; and GSEs, 178; by Long Beach Savings, 104; in toxic mortgage supply chain, 224–228; by Washington Mutual, 144–145, 146–148, 149, 155 Subprime Mortgage Crisis (2008), See also Financial Crisis of 2008 Sullivan, Martin, 195 Summers, Lawrence, 237, 238 Supreme Court: on anti-usury laws, 62; on bank holding companies, 73; on modification of underwater mortgages, 2–4, 5, 10–11, 115–118, 225; on mortgage regulation by states, 228 Suspension orders, 29 Synthetic CDOs, 197–198, 236 Systemic risk, 212–213, 279, 281 See also “Too big to fail” Systemic Risk Council, 291 Taggart, Larry, 72, 90, 92, 105 Tannin, Matthew, 190, 293 Taper, S Mark, 42, 76–77, 84–85, 91, 133 TARP (Troubled Asset Relief Program), 254, 294 Tax policy, 67–68, 75–76, 229 Tax Reform Act of 1986, 229 Tea Party movement, 265 Teaser interest rates, 13, 65, 126 Term Securities Lending Facility (TSLF), 206 Texas: condominium market in, 32–33; deregulation in, 61–62, 69, 71–72; foreclosures in, 15; S&L regulation in, 17–18, 22–24 Texas Commerce Bank, 111 Texas League, 30 Texas Pacific Group, 207, 222 Texas Savings and Loan Act of 1963, 23 Texas State Savings and Loan Department, 22, 23, 28, 30 Texas State Securities Board, 30 Thomas, Clarence, 11, 16, 117 Thrifts See Savings and loans (S&Ls) Timberwolf tranches, 186, 198, 236 Toler, James, 25, 31, 288 “Too big to fail”: and American Savings and Loan, 87–90; and Dodd-Frank Act, 280–282; and FDIC, 212; and S&L crisis, 4, 5; and Treasury Department, 292 “Too small to save,” 126 Tourre, Fabrice, 290 Town East Savings Association of Mesquite, 18 Toxic mortgages, 222–246; and CDOs, 233–235; and CDSs, 235–239; and default risk, 245–246; and deregulation, 223–224; and leverage, 239–245; and securitization, 228–233 TPG Capital, 207, 222 Tranches, 156–157 Travelers, 231 Treasury Department: and AIG bailout, 250; and bankruptcy reform, 262–263; and deregulation, 69; and financial crisis, 249; and mortgage industry regulation, 172; and national banks, 39 Troubled Asset Relief Program (TARP), 254, 294 Truman, Tim, 114 Truth in Lending Act of 1968, 129 TSLF (Term Securities Lending Facility), 206 Undersecured creditors, 113 Underwater mortgages: assistance programs for, 263–264, 265, 294–295; and bankruptcy reform, 251–252; and financial crisis, 282; modification of, 2–4, 5, 10–11, 115–118, 225 Underwriting standards: and deregulation, 69; and financial crisis, 279, 282; and secondary mortgage market, 43; and S&L crisis, 5; at State Savings and Loan, 82, 84; and subprime lending, 146–147; and toxic mortgage supply chain, 226; at Washington Mutual, 141, 164–165 Unemployment, 55, 282 United Savings Association of the Southwest, 104 U.S League of Savings Institutions, 60, 93, 225 U.S Savings and Loan League, 30 Unsecured creditors, 112 Usury laws, 62, 147 Vacancy rate, 162, 170, 182 Vanasek, James, 163–164, 165 Variable-rate loans, 53–54 See also Adjustable-rate mortgages (ARMs) Veterans Administration (VA), 41, 44 Volcker, Paul, Jr.: and Continental Illinois bailout, 89; as Fed chairman, 49, 125; and Group of Thirty, 219; and inflation, 47–48, 51, 52–56; as New York Fed president, 48; as Systemic Risk Council advisor, 291 Volcker Rule, 281–282, 285, 300 Wachovia Bank, 178, 228 Wachovia Mortgage Corporation, 228 Wachter, Susan, 166 Waldman, Daniel, 272 Wall, Danny, 93, 95–100, 102, 106, 216 Wallison, Peter, 276, 277, 278 Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (Levin-Coburn Report), 274 See also Levin-Coburn Report Warren, Elizabeth, 264, 292, 301 Washington Mutual (WaMu), 123–162; AIG’s investigation of, 191–192; American Savings Bank acquired by, 123, 124–125; and appraisals, 128; and brokered deposits, 200; and CDSs, 236; Compliance Department, 181; culture of, 136–137; and FDIC, 213, 245–246; fraud at, 160–161; and gain on sale, 155–156; growth of, 131–134; hedging of interest rate risk at, 151–153; higherrisk lending strategy of, 153–155, 193–194; history of, 134–135; and housing bubble, 127–130, 164; incentive programs for loan origination, 142; JPMorgan Chase’s acquisition of, 250, 286– 287, 298–299; Killinger as CEO for, 137–139; Legal Department, 181; and Long Beach Mortgage, 148–150; management at, 160–162; and MBSs, 156–159, 229; mortgage origination and securitization at, 140–162; and Option ARMs, 130–131, 140, 143–145, 154–155, 160, 173– 174, 199; and rating agencies, 159–160; run on, 249–250; subprime lending by, 144–145, 146– 148, 149, 155; write-downs of high-risk mortgages by, 199 Washington National Bank, 134 Washington National Building Loan and Investment Association, 134 Waterhouse, Scott, 298 Watt, Mel, 294 Watters v Wachovia Bank (2007), 228 Weiland, Peter, 297 Weill, Sandy, 300 Wells Fargo, 178, 295, 298 Whalen, Christopher, 235 Whale Report, 297–298 See also London Whale trading losses Why the Real Estate Boom Will Not Bust—And How You Can Profit from It (Lereah), 257 Williams, Julie, 228 Wolfson, Martin, 168 Working Group on Financial Markets, 238, 272 World Economic Forum, 295 Wright, Jim, 93 Yellen, Janet, 182 Yield-spread premium, 130 Zyne, Rosemary, 11, 108, 112, 115 ... Jennifer Other people’s houses : how decades of bailouts, captive regulators, and toxic bankers made home mortgages a thrilling business / Jennifer Taub pages cm Includes bibliographical references and. .. similar to American Savings and Loan Association, the California S&L that bought the Nobelmans’ mortgage a month after it was originated And, American Savings Bank did purchase American Savings and. . .OTHER P EOPLE’S HOUSES OTHER PEOPLE’S HOUSES How Decades of Bailouts, Captive Regulators, and Toxic Bankers Made Home Mortgages a Thrilling Business JENNIFER TAUB Published with assistance