All The Devils Are Here: Unmasking the Men Who Bankrupted the World (27 page)

It would be hard to call what went on at Ameriquest risk-based pricing. Ameriquest had a rule capping the points and fees on any one loan at 5.5 percent. (This was to avoid running afoul of several state laws with similar caps.) But, according to a former loan officer, the goal in the branches was to charge as close to that limit as possible. The creditworthiness of the borrowers mattered a lot less than whatever the loan officer thought he could get away with.

A spreadsheet of all the loans Ameriquest made in the month of February 2005 offers a vivid illustration. One customer with a midgrade credit score got a loan of $750,000—and paid the maximum in points and fees. The revenue to Ameriquest was $41,226. Another customer with a $750,000 loan paid so little in fees and points that the loan generated only $1,830 for Ameri-quest. Yet that second customer was far less creditworthy than the first. Another example from that same spreadsheet: Two borrowers, both with the same credit score, took out 2/28 loans of roughly the same amount. One of them paid over 3 percent in points to get a 6.5 percent interest rate (revenue to Ameriquest: $31,320). The other paid almost no points for the same rate (revenue to Ameriquest: $2,559). Ameriquest’s total revenue for just that one month was $87.5 million on $2.5 billion in loans.

Ameriquest also had special “portfolio retention” branches, whose job it was to prevent Ameriquest borrowers from refinancing with competitors. They would pay fees to the big credit bureaus and get alerts whenever an Ameriquest customer requested a credit check. That was standard practice in the industry, according to former loan officers. But they also sometimes did something far sleazier. Bob says that certain Ameriquest employees would hack into the system and print out a sheet with everything about a borrower: the size of their loan, their social security number, birth date, and contact information. The loan officer would then call borrowers who hadn’t even voiced an interest in a refinancing, offering a new loan with a reduced interest rate—and hefty new fees for Ameriquest. “The reality was you were screwing
people again and again and again,” Bob says. (ACC says that it was “against company policy to misuse company assets, including customer information,” and points out that every employee received and signed a document acknowledging this.)

And what happened when complaints about these practices leached into public view? Once again, Arnall fell back on his old playbook: he spent whatever it took to make them go away. In late 1999, the grassroots organization ACORN picketed twenty Ameriquest offices, accusing it of deceptive lending tactics. Ameriquest responded by committing to fund $360 million in ACORN-originated thirty-year fixed-rate loans. ACORN stopped picketing. (Very few of the loans were ever made.) In 2001, a group of Ameriquest borrowers filed a class action lawsuit against the company—the first of many. In settling, Ameriquest agreed to pay up to $50 million in reimbursement. Three years later, the state of Connecticut charged Ameriquest with violating a state law regarding refinancings. The company paid $670,552 to settle the charges. In 2005, Connecticut announced a second settlement over the same issue. Ameriquest blamed the problem on new employees who didn’t know the rules. It paid $7.25 million to move on. “Roland was not a cheapskate,” says Greenlining’s Robert Gnaizda. “He spent money if he thought it would be helpful.”

As Ameriquest became the country’s dominant subprime lender, Arnall himself became extraordinarily wealthy. In 2004, he made the Forbes 400 list of richest people in America, with a net worth of $2 billion. The following year, the magazine estimated his net worth at $3 billion, ranking him seventy-third on the list. (He tied with Yahoo co-founder David Filo.) By then, he and his second wife, Dawn Arnall, owned a $30 million, ten-acre compound in Los Angeles, and a 650-acre ranch in Aspen, snuggled between two ski resorts. The former property had been owned by Sonny and Cher in the 1970s; the latter was the second most expensive home in the country, according to a list compiled in 2004 by
Forbes
magazine. It cost Arnall $46 million.

Through it all, he never changed. Although Ameriquest had a far higher profile than Long Beach ever had, Arnall himself remained in the shadows. His companies never went public. Others served as their chief executives. He remained ever demanding, yet ever gracious, respectful even of the company janitors. The wealthier he got, the more he spent on quiet philanthropy—and on political contributions, mainly to Republicans.

And from his office in ACC’s bland twelve-story headquarters in Orange
County—the epicenter of the subprime industry—he never, ever spoke about the practices that permeated the branch offices. Headquarters, in fact, acted as if the company were a paragon of subprime virtue, rather than a place that oozed with sleaze and fraud. In July 2000, for instance, Ameriquest publicly committed to a set of best practices, which included promises to let two years pass before refinancing any loans and to refrain from offering loans with balloon payments and negative amortization. The following year, Ameriquest’s chairman, Stephen Prough, testified before the Senate banking committee; Ameriquest had been invited to testify because many in Washington considered Ameriquest a model subprime lender.

Yet the evidence suggests that the best practices were mainly honored in the breach. One example: after an exhaustive analysis of public records, the
Los Angeles Times
determined that nearly one in nine 2004 Ameriquest mortgages was a refinancing of an existing Ameriquest loan less than twenty-four months old—precisely what the company had promised it wouldn’t do. (ACC says that many of Ameriquest’s borrowers were not pushed into these refinancings but came to the company of their own volition. The
Times
also noted, however, that Ameriquest’s refinancing rate was higher than that of six competitors included in its analysis.)

The question of how much Arnall knew about his company’s sordid lending practices is something we’ll never know; Arnall died in 2008, after being diagnosed with esophageal cancer, and without ever being pinned down about what, exactly, his involvement was. Even to some at ACC, he was a mysterious figure. He tended to float above the problems and never got involved in the nitty-gritty of the business. “Never, ever did I ever see him pick up a loan file,” says a former executive.

On the other hand, how could he not have known? The company was constantly being hit with accusations, investigations, and lawsuits charging fraud and deceptive practices. “We were inundated with stories about the conduct of the sales personnel—everything from drug use and fraud to theft and gang affiliation,” says another former executive. At best, Arnall seemed to have practiced a kind of willful ignorance.

In January 2003, as questions about Ameriquest’s practices were heating up, the company hired a mortgage veteran named Ed Parker to investigate fraud in the branches. At first, Parker says, he was hopeful he would be given the authority to do the job right. In his first investigation, he helped shut down a branch in Michigan after looking at twenty-five hundred loan files and discovering that the loan officers were all using the same few appraisers to
inflate the value of properties. The fraud wasn’t subtle—there would even be notes in the files spelling out the value the appraisers had been told to hit. Ameriquest repurchased the loans from lenders who had bought them.

But Parker says that other executives made comments that caused him to think they didn’t really want him to be such a zealot. He soon decided that, as he later put it, “I was not brought in to do a job. I was brought in to provide cover.” In Fresno, he discovered that branch employees were manipulating bank statements to make it appear that the prospective borrowers had more cash reserves than they did. They would cut and paste information from one borrower’s statement to another’s. Several of the implicated employees had been promoted to branch managers. At other California branches, Parker discovered that stated-income letters were being manufactured that misrepresented the age of elderly borrowers. One loan application stated that the borrower was a forty-four-year-old consultant who earned $8,000 a month. In fact, the borrower was seventy-four. In the Florida branches, says Parker, “there were just so many problems with the loans.” He would record what he found, send it to management—and nothing would happen. He says he was turned down for promotions, cut out of decision making, and eventually fired in July 2006. In a lawsuit Parker filed alleging employment discrimination, he claimed that Ameriquest was “engaged in massive fraud for years.” He says now, “My problem was, they did not want to know.”
^*

What Arnall’s defenders say—indeed, what all the defenders of the subprime originators would say after the fact—is that the true villains were not the lenders on Main Street but the investment firms on Wall Street. Wall Street, after all, was both making the warehouse loans on which the subprime companies depended and then buying up their mortgages and securitizing them. The Wall Street firms, in fact, were dictating what kind of mortgages they would buy and at what price. They wanted the riskiest subprime mortgages they could get their hands on, because those were the mortgages that generated the most yield. In a presentation to the board of directors, Washington Mutual executives noted that subprime loans were roughly seven times more profitable than prime mortgages, because the company could sell them for
so much more. WaMu used to award its sales staff a bonus if they could tack on a prepayment penalty to the loan—which was something else Wall Street wanted.

“Wall Street set the product guidelines,” says a former Ameriquest executive. “I can’t say to the consumer, ‘Here’s your rate.’ Wall Street figures out what investors are willing to pay. They design it and they present it to you. If they say, ‘Don’t put it on my warehouse line,’ that means you can’t make the loan.” This executive claims that he wanted to offer loans without prepayment penalties, but he couldn’t, because Wall Street wouldn’t buy them. “Ultimately, the market is driven not by what is best for borrowers, but by what products investors can invest in,” Ameriquest’s vice president for capital markets, Ketan Parekh, told a trade publication in November 2004.

Jon Daurio, the executive who had worked for Arnall at Long Beach and then went on to form several other subprime companies, recalls a meeting in 2003 with some representatives of Bear Stearns. “How can you increase your volume?” the Bear Stearns bankers asked him. “We said, tongue in cheek, ‘Well, we can do a 100 percent loan-to-value stated-income loan for 580 FICO scores!” Translated, that meant making loans with no down payment and no income verification to borrowers with very low credit scores. Daurio continued: “They said, ‘Okay!’ We said, ‘No problem! Let’s do this all day!’ And we did it, in massive quantities.”

Perhaps the most dangerous manifestation of Wall Street’s demands was something called a payment option adjustable-rate mortgage, or a pay option ARM. Pay option ARMs gave consumers the right to choose whatever rate they wanted at the start, from a very low teaser rate to a higher rate that more resembled a thirty-year fixed mortgage. The teaser rate, which most people chose, was so low that it often didn’t include all the interest, much less principal, meaning that additional interest was accumulating even as the borrower was paying the mortgage. Most pay option ARMs had reset triggers, so that if the borrower’s loan balance reached, say, 115 percent of the original amount, he or she would automatically have to begin paying the full rate. Because the amount due each month could escalate so suddenly and dramatically, the phrase “payment shock” became an unwelcome, but very common, feature of pay option ARMs.

Wall Street loved pay option ARMs. So Ameriquest, New Century, WaMu, all the big subprime lenders began trafficking in them. They were extremely lucrative. WaMu, according to its internal presentations, could make more than five times the profit selling an option ARM to Wall Street than a prime fixed-rate loan.

The only party that was leery of them, in fact, were the
customers
—and rightfully so. Their terms were so pernicious that they wound up crushing hundreds of thousands of borrowers even before the bubble had ended. In the fall of 2003, WaMu held a series of focus groups to figure out how to sell more pay option ARMs. According to a summary of the focus groups, “Very few people simply walk through the door and ask” for an option ARM. In fact, the summary continued, most borrowers said that pay option ARMS were a “moderately or very bad concept.” They also said things like, “It’s really scary to me what’s going to happen in five years” and “I have this feeling of impending doom.” Most customers said that they “felt good being able to pay a portion of the principal each month because it seemed to be the right thing to do.”

But customers could be persuaded to take a pay option ARM with the right sales pitch. WaMu, for instance, noted that if the salesperson told the borrower that “price appreciation would likely overcome any negative amortization,” they often came around. Pay option ARMs, in other words, were sold, not bought. “Participants generally chose an option ARM because it was recommended to them,” the WaMu summary said. (A Federal Reserve Bank of Atlanta study later correlated financial literacy to mortgage delinquencies, implying that unsophisticated consumers were the ones most likely to fall for this kind of pitch.)

Later, after everything had come to an end, an Ameriquest loan officer named Christopher Warren posted a rambling confession online about his years in the mortgage business. Of his three years at Ameriquest, where he said he started as a teenager, he wrote: “[M]y managers and handlers taught me the ins and outs of mortgage fraud, drugs, sex, and money, money and more money. My friend and manager handed out crystal methamphetamine to loan officers in a bid to keep them up and at work longer hours. At any given moment inside the restrooms, cocaine and meth was being snorted by my estimates [by] more than a third of the staff, and more than half the staff [was] manipulating documents to get loans to fund, and more than 75 percent just made completely false statements … A typical welcome aboard gift was a pair of scissors, tape and white out….” He left, he said, with the personal information of 680,000 Ameriquest customers to start a company called WTL Financial. His new company, he admitted, faked credit scores, pay stubs, and bank statements in order to sell $810 million in securities backed by his loans. He could get away with it because Wall Street didn’t care.