All The Devils Are Here: Unmasking the Men Who Bankrupted the World (26 page)

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:

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 affordability products—loans with low “teaser” rates that would quickly reset at a new, higher rate, for instance, or even “negative amortization” loans, in which the borrower paid less than the interest due, so that the principal got bigger, instead of smaller. Often, borrowers used the low teaser rate in the hopes of flipping their new home at a higher price before the new rate kicked in. Speculation was widespread.

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 for more than a dozen entities, including Ameriquest and Town and Country, two retail subprime lenders with their own sales force, and Argent, which sold loans through independent brokers. According to the
American Banker
, from 2001 to 2004 ACC’s loan volume grew more than twelvefold, to $82.7 billion, putting ACC atop the list of subprime lenders that year. According to figures published by the
Los
Angeles Times
, between 2002 and 2004 ACC generated $7.6 billion in revenue and earned $2.7 billion in profits. Ameriquest itself made more than $80 billion in loans in 2004, its peak year.

In some ways, Arnall followed his old playbook: he made high-priced loans to people who would eventually have trouble paying them back, and he sold the loans to Wall Street. But he did it on a much bigger scale than Long Beach, boosted by a massive advertising campaign. Ameriquest paid $2.5 million a year for the naming rights to the Texas Rangers stadium, and another roughly $3 million to sponsor the Rolling Stones’ A Bigger Bang tour in 2005. It spent untold sums on commercials, blimps, and sponsorship of everything from NASCAR to the popular PBS program
Antiques Roadshow
. The company’s slogan was—what else?—“The Proud Sponsor of the American Dream.”

Executives were extremely well paid. Wayne Lee, who had worked for Arnall since 1990, spent one year as Ameriquest’s CEO before quitting in the spring of 2005. He later said in a deposition that in 2004 and 2005 he had received yearly bonuses of around $5 million on top of his roughly $330,000 in salary. His severance agreement was truly astounding. In return for working a maximum of twenty-five hours every three months and agreeing to neither compete with nor disparage ACC, the company agreed to pay him $50 million.

As for loan officers, they got a small base salary, but made most of their money on commissions—typically 15 percent of all the revenue they generated. And the perks were fabulous. Every year Ameriquest hosted an event called the Big Spin in Las Vegas for hundreds of top producers. In 2004, Jim Belushi was the emcee and the rock band Third Eye Blind played. In 2005, the head of national sales, Mary Jo Shelton, was shot out of a cannon to start the festivities, and the Black Eyed Peas played. One loan officer, Joe McGregor, just out of college, won a Hummer that year. When someone asked him if he was excited, he replied, “Well, yeah. I’ve already got one.” The company also gave its top three hundred loan officers an all-expenses-paid trip to Hawaii in 2005.

“The amount of money the company had to throw around was staggering,” says a former corporate employee. “These guys in sales who were twenty-five years old and maybe had a couple years of college were making incredible money and driving Porsches. It felt like something was wrong.”

When they weren’t partying, the young loan officers at Ameriquest were
under enormous pressure to move loans. “It was a chop shop, and the whip was always being cracked for more,” says Mark Bomchill, describing the Ameriquest office in Minnesota where he worked from 2002 to 2003. Two other former loan officers, interviewed separately, used the same description: “Think
Glengarry Glen Ross
.” Loan officers were often required to make a certain number of outbound calls each day—a hundred fifty, says Bob—and there were “power hours” for cold-calling. Managers were “brutal to those who weren’t closing loans,” recalls another former employee. Firms took anyone—“car wash guys, let alone car salesmen,” laughs Bob. Executives said they hired young, inexperienced people to keep costs down, though former loan officers say the real reason was that inexperienced loan officers were less likely to realize that “they were screwing people over,” as one of them put it. The branches were run a little like frat houses. Once, says Bob, a handful of loan officers were blindfolded while a manager yelled out lines from the movie
Boiler Room
.

Fraud was an everyday occurrence. “You’d look over and there would be a guy altering W-2s,” says Bomchill. One loan officer, Lisa Taylor, who worked in Ameriquest’s Sacramento office from 2001 to 2003, filed a sexual harassment and wrongful dismissal case alleging that Ameriquest management “condoned, encouraged and participated in extensive document alteration, manipulation and forging in order to sell more loans.” Taylor later told the
Los Angeles Times
that she’d walked in on coworkers using a brightly lit Coca-Cola vending machine as a tracing board so loan agents could copy borrowers’ signatures onto blank documents. (She also said in her complaint that Ameriquest had hired a “self-avowed porno king who made no secret of the fact that he sold sex toys online in his spare time.”)

In 2003, Ameriquest tried to tighten up its lending standards. Among other things, it changed its compensation guidelines so that loan officers were no longer rewarded for tacking on additional fees, and it implemented new software designed to prevent fraud. But the relentless pressure for loan volume never changed, and in the branches there always seemed to be ways of getting around the new policies. “It is absurd to suggest that their 2003 changes ‘solved’ the problems,” says one longtime critic.

Ameriquest’s core product was something called a 2/28 loan, meaning it had a low fixed rate for two years, and then converted to a higher adjustable rate for the remaining twenty-eight years. What made a 2/28 loan particularly pernicious is it often came with a three-year prepayment penalty. That meant
that the borrower either had to refinance at year two—and pay a hefty fee—or pay the higher rate for a year before refinancing without having to pay a penalty.

Then there were the points and fees Ameriquest charged. In theory, borrowers pay up-front points to reduce the interest rate on their loan. And in theory, risk-based pricing—or charging consumers based on the risk they represent—means that riskier borrowers should pay more. Indeed, that’s the essential justification for subprime lending.