Director of Investor Relations, Wells Fargo & Co
Mortgage Crisis in a Nutshell - Presented by John Campbell
In this one-hour video, Attorney John E. Campbell explains the main aspects of the mortgage crisis that has devastated the U.S. housing market and the economy.
This video was produced by John Campbell and Erich Vieth, who are both attorneys (along with Alicia Campbell) at Campbell Law, LLC in St. Louis, Missouri. http://campbelllawllc.com/ John is also on the faculty of Sturm College of Law at the University of Denver. A substantial part of their law practice concerns issues pertaining to mortgage fraud and unlawful foreclosures. The attorneys of Campbell Law have filed numerous individua...
About John Campbell
In a 2012 video titled "Mortgage Crisis in a Nutshell," John Campbell, an attorney and director of investor relations at Wells Fargo, presented an overview of the U.S. mortgage crisis. Campbell described the role of non-traditional lenders like Ameriquest in issuing "no doc" or "liar loans" where income was not verified. He stated that these loans were often sold quickly as securities, a process he called "securitization," and that rating agencies rated them AAA based on summaries rather than individual loan reviews. Campbell also discussed the Mortgage Electronic Registry System (MERS), which he said held 60% of mortgages originated during that period, and described "dual track" foreclosure practices where banks would negotiate with homeowners while simultaneously proceeding with foreclosure. Campbell contrasted what he described as a transparent system that worked for 200 years with a "shadow system" in which he said banks profit regardless of loan performance. He attributed the collapse of the economy and the need for bailouts to the latter system, stating that "the only people who will continue to profit from it are the people who invented it and that's generally the banks and Wall Street."
Transcript (27 segments)
J
John Campbell0:12
I have been working with a number of people, including Eric V, who's making this video with me, to try to get my head around what's gone wrong in the American mortgage industry. How it's all related between bad loans and the bailouts and foreclosures and all the things I'm seeing in the news, robo-signing, empty homes on my street. What I've tried to do here is, in some pretty simple terms, admittedly not in immense detail, not always from a scholarly perspective but from a hands-on perspective, talk about how this all started, what's going on in the past, and what's going on now in the mortgage crisis.
You probably know somebody who's lost their home or is worried about losing their home, or you might have lost or be worrying about losing your own home. What I want to do in this video is help you understand how things like exotic mortgages, the bailout, foreclosures, and the foreclosure crisis fit together, how they're affecting people around you, how they affect you. The reason I want to do that is because I think if you understand it, you might be able to help fix it. I'm convinced that until people understand it, the only people who will continue to profit from it are the people who invented it, and that's generally the banks and Wall Street. They've profited so far at the expense of you and American homeowners. So I'm going to tell you about it.
People who are being foreclosed on in their homes and are wondering who it is that's foreclosing, why they're foreclosing, and what they can do if they think the foreclosure is wrong, all the way to people who are being kicked out of their homes after a foreclosure even though they still want to defend their home, they still believe they were paying on time, and they can't get anybody to listen. There's a lot of things in between. I've read about this, I've studied this, and what I realized was when I hear the media report about robo-signers, or adjustable rate mortgages, or a horrible foreclosure in Florida where a bank foreclosed on a home that didn't even have a loan, those are pieces of a bigger picture. If we can see the big picture a little bit and start to get our heads around it, we can start to understand what's happening.
Trust me, I'm going to talk about it in a way that I'm comfortable with and I think can be proven and is true, but I'd invite you to go out and start reading about this after you watch this video. Put me to the test. Check out the stuff we're talking about. I think you're going to be shocked with what you find out about what has happened in America to the American dream of owning a home, and the role that large financial institutions and banks have played in destroying our economy, devastating the ability for people to own homes, and damaging your property values. They continue today to profit from it at the expense of the taxpayers and the people in the homes. I think they do it because the system is so complex that nobody's really gotten their head around it, at least not the average person.
Before, maybe he wanted to buy a bigger house. Maybe Joe had never owned a home. Sometimes Joe was Susan, a single mother. Sometimes it was Joe and Susan. But we had somebody who wanted to buy a house, and they went to borrow money. Very often in the early 2000s, the person they went to, or the entity they went to, was a non-traditional lender. That's what I have here: non-traditional lender. Let me give you an example because you've probably heard of them. Their initials are AMQ, they're called Ameriquest. When I write it, you may have flashes of Ameriquest and the Super Bowl, because in the mid-2000s, Ameriquest sponsored the Super Bowl halftime show. This was a big company with billions of dollars, and they were a non-traditional lender. Here's what Ameriquest did.
They didn't have a perfect credit score, but we know that a lot of people who got subprime loans just didn't understand their credit scores. There are different numbers out there, but certainly a good chunk of people who got subprime loans had decent credit and probably could have gotten a loan at a community bank, but they were marketed heavily to by people like Ameriquest and others. So they go, they want a loan. Let's just talk through it because you've probably heard that people like Joe get what they deserve. You've heard at least some people say this: why would anybody take a loan they can't pay? Well, I want to tell you, at least what I've experienced talking to people like Joe, Joe took a loan from Ameriquest. When he went in, he said, 'I'd like to borrow enough money to buy a home.' Maybe he had a house in mind, maybe he had a price point in mind, or maybe he said, 'I can afford $800 or $1,000 a month.'
Good rates and really good deals, and we can put you in a home. So what would often happen, and we'll just use really simple numbers, is that a $100,000 loan became a $200,000 loan for Joe. And who didn't want a little more house for their family? An extra bathroom for the kids, another spot in the garage. How did they do it and why? Well, this is it in a nutshell. Ameriquest had the ability to make loans to people like Joe with very little underwriting. We'll talk later, but traditional banks would carefully vet or examine borrowers. Ameriquest started doing what were called no-doc or sometimes called liar loans. They would make a loan where the income was never verified, and in fact, often the person's income was stated but never checked.
A percentage of $100,000 or a percentage of $200,000? It was better to get a percentage of $200,000. They were not responsible for whether or not the loan got paid off. They made their loan money when the loan was written, so they also didn't engage in any real appraisals. When they loaned money on this $200,000 house, they didn't go out usually and have an appraiser walk into the home and kick the tires, so to speak, on the house. They often did an appraisal from California on a house in Detroit. They'd say, 'Well, we'll look at houses around it, take some pictures online, and make our best guess.' There was every reason to get the appraisal high enough to write the loan, especially for that person working on commission. Why would Ameriquest let its loans go?
A bank or an institutional or non-institutional, non-conventional lender, why wouldn't they keep it and collect the money? That's what banks had done for years: collect the money for 30 years. Ameriquest didn't want to collect the money; they wanted to make the money right then, as fast as they could. This is a get-rich-quick scheme. So they'd make the loans and then try to sell them. Let's talk a little more before we move on about what kind of loans they made, because it's going to be important for understanding Joe and why he loses his house later. They made what were called by many people now exotic loans. You've heard about these: things like adjustable rates. But they don't mean the rates could go up or down; it means the interest rate could only go up, and in fact, in most cases, in about two years, it was guaranteed to go up. They made interest-only loans, which means you paid for a number of years, and when you...
Documents that were 20, 30, 40, 50, 60, 100 pages. Sometimes they would give you multiple copies so that what was handed to you was several hundred pages of loan documents. Where did these closings happen? They'd meet you on your lunch hour, send a notary out to a restaurant, run by your house after work. For the average person taking a loan, examining 400 pages of documents or 50 pages of fine print was intimidating. If they told them what the loan was and what the monthly payment was, they signed. The problem was those monthly payments weren't guaranteed; they could adjust, and sometimes they could double. Imagine if you took a loan because you knew you could pay $800 a month, but two years from now it's $1,200.
Loans, but again, Ameriquest didn't care. We're going to talk about that: it's because they'd sell the loans. So here's what they did. They took the loans and put them in a bundle. These bundles would have sometimes a thousand loans, sometimes as many as 10,000 loans. They were loans from all over the country to all kinds of people. They would describe them and say, 'This is a bundle of loans where the average interest rate is from here to here, and the average credit score for the borrower was X,' without talking about why that was the credit score, or how many were low and how many were high, or how many were in the middle. They'd say generally these are adjustable rates or whatever. Then these loans would get rated by places like Moody's, which rate different things including stocks.
There was some number that was like maybe 5% of loans failed. If you looked at these loans and said, 'Well, these are average people taking average loans,' you figured some will fail, but overall it'll perform. This bundle of loans will pay. The problem, of course, was these weren't traditional loans as we talked about. They were exotic loans. They had no real appraisals, they hadn't been underwritten, and they were sold by people who had no skin in the game because once they sold the loans, they didn't care if they performed or not. So they're rated. Then people on Wall Street, let's call it a bank or an institutional investor or whoever, would buy these. Often what they would do then, this is kind of interesting, this was called securitization. This is where loans became securities, things that could be bought and sold as a bundle on Wall Street.
Trade backed by a home asset, being the home-backed securities. Here's how it would often work. You'd have somebody who gathered them up called a depositor. That depositor would then sell them into a trust that would have a trustee. That trustee would oversee a big bundle of loans, what's often called a pool of loans. They had these things called pooling and servicing agreements, which were really 400-page documents in fine print that said, 'Here's what loans are coming into this group, here's who owns them, here's who gets the money when it's paid, here's...'
Somewhere, and they would actually hold them and then they'd have to try and come and collect. As you probably guessed by now, in the hustle to make money as fast as you could and in the demand for more and more loans, Ameriquest was more and more irresponsible, and lenders like it made as many loans as they could as fast as they could. These banks weren't really paying much attention to what was in the loans, and the rating agencies were looking at summaries. They weren't pulling open the loans and looking at Joe to figure out if he really made what the loan document said, to figure out if the house was really worth $200 or $100, and to figure out what the loan would look like in two years. They weren't doing that. So everybody's buying into this idea of buying more and more loans, and as long as people pay like they've always paid, we're all going to make lots of money.
The original documents that meant people should pay being shredded, lost, thrown away, failed to be transferred. The second problem is a bigger one: too many people like Joe who took out the loan believing they could pay it found out two years later that the note adjusted. Since Joe didn't magically come into 100% more income or 200% more income, he couldn't pay. So when he couldn't pay, the notes started to fail. To paraphrase what the banks and these trustees and investors said, 'Oh,' because what they'd done was they bought a bill of goods that was never going to perform. This is where you started to hear 'too big to fail' because some companies had insured these.
They thought, 'If the government doesn't help us, we're going to fail. We're going to fall apart, and when we do, the whole economy is going to fall apart. Banks are going to close, your money's going to disappear, investment portfolios are going to go away, people that own mutual funds are going to lose their money, and it's going to be Armageddon.' That's what they said over and over again. So enter the feds. The United States government, you paid for a bailout. That bailout cost hundreds of billions of dollars, or by some people's estimates, including all the other loans and things that happened, trillions of dollars. It cost a lot of money; nobody doubts that. So the banks are bailed out, and that keeps the banks propped up in theory. Then the banks go on.
People who are telling them they look good aren't really looking under the hood. They're buying the representations of this original company. Now we have these big banks on Wall Street and institutional investors buying and trading loans, often sloppily, often outside of compliance with their own agreements, often losing the documents and never knowing what's in them. Then when these loans start to fail because the average person where it all started can't pay on a loan that isn't what they thought it was, and they're at risk of losing their home, we have the bank say, 'Help, help, help' to the federal government. We see them get a lot of money. So that takes us up to sort of the bailout. So what happens?
Bets on these notes, and then there were bets on the bets and bets on the bets on the bets. That's what you might have heard when you hear about CDOs and all sorts of things. So this became a huge mess, a trillions of dollars mess. In fact, some of this stuff was even sold to other countries as a good deal, and those countries and investors overseas who bought it are also now suffering from buying it. Of course, there were companies like AIG that insured some of these, and if you insure stuff like this, you're not going to last long. Then there are companies like Goldman Sachs, who you might have seen on the news because they were doing something really interesting, and they weren't the only one. They were buying the stuff and sometimes holding what were going to turn out to be very bad investments. They were also selling it to others at the same time, and in fact, they were even letting people bet against it.
Buy things from you saying 'best chance ever to buy.' That might be what you've heard of when you hear people talk about Goldman Sachs. But let's move forward and talk about foreclosure.
Foreclosure can happen a couple of ways. One is somebody really doesn't pay. That happens: Joe can't pay the loan. But unfortunately, we're also seeing foreclosure happen a lot of other ways. For example, someone misses one payment. They call in and say, 'I missed the payment, what do I need to do?' The bank says, 'We're going to put you in a modification and change the terms of your loan so that you can better pay it.' Maybe that just means we're going to forgive some late fees, maybe it means we're going to get you a better interest rate because they're falling, maybe it means we're going to stretch the loan over a longer period.
While a person's talking to the bank about getting the loan modified because they need a different payment schedule because they missed one payment because they lost their job in a bad economy, we're at 10% unemployment or 8.5% or 15% depending on how you want to measure it. People call in and ask for a little help. The bank says, 'Yeah, we'll talk to you.' While they're talking to them, at the same time, often another department within the bank is moving forward to foreclose. So we see people who get foreclosed because they didn't pay. We also see a lot of people who are getting foreclosed because they're trying very hard to pay, and while they're trying to figure that out, the bank is foreclosing. That's what you might have heard called a dual track. In the newest settlement with the big banks, which we could talk about whether or not it's going to help, one of the things that some of these big banks agreed to do is stop that.
You may have heard the one from Florida where Bank of America foreclosed on a home for which there was no note. In this mess of paperwork, we had a situation where documents weren't kept. Sometimes I think banks don't know what they own. They don't know who's paid, they don't know who should pay, and they don't know who they should foreclose on. That doesn't stop them.
So how does foreclosure work? In its simplest form, the trustee tells somebody, usually it doesn't do it itself, it tells somebody else, maybe the servicer, 'Go foreclose on Joe.' Depending on what state you're in, whether you're in a judicial state or a non-judicial state, the process is different.
You have to file documents that show they own the note, that they're the person who should have been paid, that they haven't been paid, and that they have a right to foreclose because everything's in order and all the paperwork is right. States have always been very serious that before you kick somebody out of their home, you need to show that you're the person they owe the money to, that you hold the deed or the mortgage, and that you have the right to take the home. Not just that they owe you money, but that you also have the right to the house. This is a term you've probably heard: robo-signers. What are robo-signers? The first time you heard it, you thought, 'Is this like literally a robot? Is it a machine printing signatures?' What this was is the banks needed people to sign various documents, documents that assign the note from one person to another.
Robo-signing took a couple of forms. One is people were hired who needed a job, and often they had a background as a waitress, a hairdresser, a truck driver, or whatever. They'd never worked in finance. They were told, 'Sit at this desk, sign these affidavits that say these are true and accurate copies, and that you've reviewed files. Sign here, and we'll stamp it with a notary.' The people who signed probably didn't know what they were signing. Sometimes the notary wasn't even in the same state, and sometimes they signed a name that wasn't their own. So there were a lot of problems with robo-signing. These documents would be filed in court. This came out in Florida and other states where courts started to figure out that what's being filed here is not really true stuff. Some good attorneys went out and found that there were companies that could even make those documents or produce them. So there were falsified documents upon falsified signatures upon falsified notarizations.
You might remember if you watch the news, at some point a few banks said, 'We're not going to do any foreclosures in the country for the next 30 days.' That's because they had so many problems with the documents. Trust me, they didn't fix it in 30 days.
What about in a non-judicial state? If you don't live in one of these, you might find this surprising. Many states, probably 25 or more, allow foreclosure to occur without ever going to court. In these states, the party that thinks it's owed the home because it's not being paid...