The Dark Side of the American Dream

The following is an excellent excerpt from the book “CHAIN OF TITLE: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud” by David Dayen from Chapter 2: “The Dark Side of The American Dream” on page 16 and I quote: “Lisa Epstein drove down Highway A1A, along the Intracoastal Waterway, back to her old apartment in Palm Beach.  At her side was Jenna, in a car seat; atop the dashboard was an envelope containing the monthly payment on the unsold co-op.  Though her house was in foreclosure, Lisa always paid the mortgage on the apartment, her fallback in case of eviction.

Lisa gazed at the water out the window.  She never wanted to miss mortgage payments; Chase told her to do it and promised assistance afterward, but then put her into foreclosure.  The delinquency triggered late fees, penalties, and notifications to national credit bureaus.  A damaged credit score affected a mortgage company’s decision to grant loan relief, which hinged on the ability to pay.  Even if Lisa managed to finally sell the apartment, even if she could satisfy the debt on the house, the injury from this “advice” would stick with her for years.  Chase Home Finance never mentioned the additional consequences, emphasizing only the possibility of aid.  The advice was at best faulty, at worst a deliberate effort to seize the home.  Lisa spent a lifetime living within her means, guarding against financial catastrophe.  Now Chase Home Finance obliterated this carefully constructed reputation.  She felt tricked.

America has a name for people who miss their mortgage payments: deadbeats.  Responsible taxpayers who repay their debts shouldn’t have to “subsidize the losers’ mortgages,” CNBC host Rick Santelli shouted from the floor of the Chicago Board of Trade on February 19, 2009, two days after Lisa got her foreclosure papers.  “This is America!  How many of you people want to pay for your neighbor’s mortgage, that has an extra bathroom and can’t pay their bills, raise your hand!”  The floor traders in Chicago, between buying and selling commodity futures, hooted.  This rant would later be credited as the founding moment of the Tea Party.  And it signified a certain posture toward delinquent homeowners, a cultural bias that equated missing the mortgage payment with failing the duties of citizenship.  The indignation didn’t account for mortgage companies driving customers into default.  However, lenders welcomed anything that humiliated deadbeats into blaming themselves.  In most cases it worked: in the twenty-three states that required judicial sign-off for foreclosures, around 95 percent of the cases went uncontested.

But Lisa had an inquisitive mind.  Before she would acquiesce, she wanted to understand the circumstances that led to this lawsuit from U.S. Bank, an entity she had never encountered before seeing it listed as the plaintiff.  She had three questions: who was this bank, why did it have a relationship with her, and why was it trying to take her house?

As it happens, U.S. Bank is real.  It’s the fifth-largest bank in the country, with more than three thousand branches, mainly in the Midwest and the Pacific Coast, not in Florida.  Lisa learned all this through a cursory Google search.  U.S. Bank also had a toll-free customer service number.  But just like Wells Fargo, U.S. Bank’s reps had no record of a Lisa Epstein.  “Look, you’re suing me.  How could you not know who I am if you’re suing me?” Lisa implored.  She gave U.S. Bank her Social Security number, her address, all her mortgage information.  Nothing turned up.

Lisa kept every document from the closing in an old canvas bag from a nursing conference.  She read the mortgage documents line by line, the way she had while eight months pregnant and sitting in the offices of DHI Mortgage.  There was no mention of U.S. Bank, Wells Fargo, or even Chase, where she sent mortgage payments for a couple of years.   Lisa made the deal with DHI Mortgage.  How did these other banks get into the picture?

Lisa had a bit more luck when she Googled “U.S. Bank NA as trustee for JPMorgan Mortgage Trust 2007-S2,” the name of the plaintiff on her foreclosure documents.  This sent her to the website of the Securities and Exchange Commission, specificially an investor report (known as an 8-K form) for the JPMorgan Mortgage Trust.  One paragraph included every party she had become familiar with over the past several months:

“J.P. Morgan Acceptance Corporation I (the “Company”) entered into a Pooling and Servicing Agreement dated as of May 1, 2007 (the “Pooling and Servicing Agreement”), by and among the Company, as depositor, Wells Fargo Bank, N.A., as master servicer (in such capacity, the “Master Servicer”) and securities administrator (in such capacity, the “Securities Administrator”) and U.S. Bank National Association, as trustee (the “Trustee”), providing for the issuance of J.P. Morgan Trust 2007-S2 Mortgage Pass-Through Certificates.”

Most homeowners had as much chance of decoding this as they did of learning Mandarin Chinese.  Lisa had no background in real estate, economics, or high finance.  The only time she dealt with anything Wall Street-related was when she chose funds for her 401(k) upon starting a new job.  It took years of study to master nursing; nobody offered her a class in pooling and servicing agreements, or mortgage pass-through certificates.  However, everything that transformed the mortgage market, everything that layered risk and drove the housing bubble, everything that made buying a home in 2007 infinitely more dangerous than it should ever be, was contained in that innocuous-sounding paragraph.

One thousand families.  That’s how many Americans lost their homes each day at the height of the Great Depression.  Franklin Roosevelt’s response to this relentless destruction created the most successful housing finance system in the world, a key to America’s political stability and emergence as an economic powerhouse.

To stop foreclosures, the Home Owner’s Loan Corporation (HOLC) bought defaulted mortgages from financial institutions at a discount and sold them back to homeowners.  Beginning in 1933, HOLC acquired one million mortgages–one out of five in the country at that time.  Eighty percent of HOLC clients saved their homes when they otherwise might have lost them.  And once every mortgage was paid off and the program closed, HOLC even turned a small profit.

HOLC gave borrowers a twenty-year mortgage with a fixed interest rate, allowing them to gradually pay off the principal over the life of the loan, a process known as amortization.  At the time very few Americans had long-term mortgages.  The most common product lasted two to five years; borrowers would pay interest each month and then either make a “bullet” payment of principal at the end or roll over into a new loan.  When bullet payments came due during the Depression, there was no way for out-of-work homeowners to find the cash.  And mortgages holders, saddled with their own funding problems, refused to renegotiate contracts and seized the homes.  This only accelerated the housing collapse, putting more homes on the market when nobody could afford to buy.  The HOLC solution was intended to attenuate this downward cycle.  But it also eliminated the volatility of the bullet payment, which magnified periods of economic hardship.  HOLC generated confidence in the long-term, fully amortized mortgage, which previously was seen as a scam unscrupulous door-to-door salesmen used to rob lower-class laborers of down payments.

The government did not want to hold HOLC mortgages, and investors feared buying them, since the families making payments had previously defaulted.  So in 1943 Roosevelt established the Federal Housing Administration to provide mortgage insurance on HOLC loans.  Borrowers paid a small FHA premium, and investors would be guaranteed their share of principal and interest payments.  The FHA would eventually offer protection to loans made by private lenders as long as they issued mortgages with a 20 percent down payment and terms of at least twenty years. In 1938 the Federal National Mortgage Administration, commonly known as Fannie Mae, enabled this by purchasing government-insured mortgages, injecting additional capital into the lending industry.

More than anything, the system delivered security.  Families could make one affordable monthly payment for two or three decades, and glory in the dignity of homeownership.  Builders supported the desire by constructing developments of detached single-family homes outside of metropolitan centers.  The interstate highway system connected suburbs to the cities.  Subdivisions sprang up everywhere, and millions of Americans sought long-term fixed-rate loans to secure their spot in them.  The FHA loosened standards and granted insurance on thirty-year loans with as little as 5 percent down for new construction.  The GI Bill for returning World War II servicemembers further guaranteed low-rate loans through the Veterans Administration.  In 1940, 15 million families owned their own homes; by 1960 that number jumped to 33 million.  Buying a place in the suburbs became part of growing up, like college graduation or a wedding, the epitome of the promise of the middle class from the country that claimed to have invented it.  It was a utopia of white picket fences, modern kitchens, and freshly cut grass.

Private lenders filled the demand for these loans, particularly the savings and loan industry, which had been around since the 1830s (known back then as the building and loan).  The biggest problem for companies lending long is the funding: there’s money to be made, but lenders need large amounts of cheap up-front capital.  Savings and loans found the formula by funding home mortgages with customer deposits.  Government-supplied deposit insurance made ordinary Americans confident that they could put money into a bank and have it protected.  The S&Ls benefited further when Congress granted them an interest rate advantage over commercial banks.  This nudged depositors into S&Ls, increasing the funding available for mortgage finance.

S&Ls typically paid a healthy 3 to 4 percent rate of interest on accounts and charged between 5 and 6 percent on mortgages.  That small float on hundreds of billions of dollars in loans added up.  The system was mutually beneficial, and everyone had a stake in a successful outcome.  State laws initially restricted savings and loans to issuing residential mortgages within fifty to a hundred miles of their headquarters.  So the S&Ls needed communities to prosper to increase deposits and subsequently increase loans.  S&L presidents became local leaders, sponsoring local golf tournaments or Little League baseball teams.

When families encountered trouble–unemployment, medical bills, untimely death–and could no longer pay the mortgage, lenders worked with them to prevent foreclosure, because it was in their financial interest.  They made more money keeping the borrower in the home, even with a reduced payment, than having to sell at a discount in foreclosure.  This incentive maintained stability and kept home values rising.  The annual foreclosure rate from 1950 to 1997 never rose above 1 percent of all loans and was often far lower.

By 1980 there was more money sloshing around the mortgage market–about $1.5 trillion–than in the stock market.  And Wall Street investment banks looked at all that cash the way Wile E. Coyote looked at the Road Runner.  They wanted a piece of the action.

Lew Ranieri took over the mortgage trading desk for Salomon Brothers in 1978.  He was fat, unkempt, and owned four suits, all of them polyester.  In the Wall Street memoir Liar’s Poker, Michael Lewis describes Ranieri as “the wild and wooly genius, the Salomon legend who began in the mailroom, worked his way onto the trading floor, and created a market in America for mortgage bonds.”  But he didn’t issue the first mortgage-backed securities; the federal government did.

Faced with a budget deficit during the Vietnam War, in 1968 Lyndon Johnson split up Fannie Mae to push its liabilities off the books.  A redesigned Government National Mortgage Company (Ginnie Mae) continued to buy government-insured mortgages.  But the new Fannie Mae and its counterpart, the Federal Home Loan Mortgage Corporation (Freddie Mac), became quasi-private, quasi-public companies (officially government-sponsored entities, or GSEs), which could purchase conventional mortgages not insured by the government, provided they met certain guidelines–unusually thirty-year fixed-rate mortgages carefully underwritten to ensure that the borrower would pay them back.  The GSEs would pool hundreds of these loans together and create bonds; they called it securitization.  Revenue streams were created from the monthly mortgage payments, with each investor entitled to a proportional piece.  For a small fee, GSEs guaranteed payments to investors, and because investors believed the government would never let the GSEs default, they happily bought the bonds.  Investor cash built additional capital for mortgage financing, allowing more people to purchase a home.

Investment banks assisted Freddie Mac with the initial securitizations in 1971 but were only paid a small retainer.  Salomon Brothers and Bank of America (BofA) attempted to bypass Fannie and Freddie with a private-label securitization in 1977, packaging BofA-originated loans into a bond.  But government regulations prohibited the largest investors, like pension funds, from buying the securities.  Others were too spooked by the uncertainty of whether the underlying loans would fail.  And thirty-five states blocked mortgages from being sold into a private market.  Despite this, Robert Dall, the Salomon trader who brokered the Bank of America deal, believed investment banks would profit from trading U.S. home mortgages, the biggest market in the world.  They just needed creativity and some regulatory relief.

Ranieri took over at Salomon just as the savings and loans grew desperate, battered by the twin diseases of high inflation and Federal Reserve chairman Paul Volcker’s remedy, high interest rates.  This hurt S&Ls on every level.  Nobody wanted to borrow money at 20 percent to buy a home, nobody wanted to save when prices could soar next week or next month, and nobody wanted to keep money in a rate-capped S&L when they could get better returns from a money market fund or Treasury bill.

In 1981 Congress gave the S&Ls a huge tax break that allowed them to hide losses, helping to keep them afloat.  But to take advantage of the tax relief, they needed to move assets off their books.  Ranieri stepped into this void, buying mortgages from one S&L and selling them to another, profiting from the markup.  It revealed the possibilities of Wall Street involvement in the mortgage market, and Salomon made a killing.  Ranieri then got Freddie Mac to help with a bond deal that packaged older loans from a D.C.-area S&L called perpetual Savings.  Freddie’s involvement eliminated regulatory restrictions that prevented nationwide sales of mortgage-backed securities.  But to attract institutional investors with the most cash, Ranieri redesigned the bond.

Big investors didn’t like the uncertainty in mortgages: you never knew when homeowners would pay them off, so you never knew the length of the loan and the projected profit on interest.  So in 1983 Ranieri and his counterpart at First Boston, Larry Fink, created the collateralized mortgage obligation (CMO), the basic securitization structure used during the housing bubble.

Instead of investors buying bonds backed by mortgages and getting a proportional share of monthly payments, CMOs created different classes for investors with different risk profiles.  Typically there were three tranches: the senior tranche, the mezzanine, and the equity tranche.  When mortgage payments came in, the senior tranche would get paid first.  Whatever was left over went first to the mezzanine and then to the equity tranche.  Lower tranches received higher interest payments on the bond to accommodate their higher risk.  Investors buying senior tranches had confidence they would get paid off within a short time frame, usually five years.  They didn’t have to worry whether each individual borrower could afford the payments; by selling a pool of thousands of mortgages, the odd default here or there wouldn’t matter.  The higher-risk tranches had longer terms, from twelve to thirty years, and stronger payoffs.  These more complex securitizations converted the mortgage, a hyperlocal, idiosyncratic, individual instrument, into a bond, a defined security that investors could buy and sell with confidence.

The initial CMOs needed Freddie Mac: it was still the only way to get them sold nationwide.  But once the securitization structure was in place, Ranieri went to work legalizing it.  As a trader told Michael Lewis about Ranieri, “If Lewie didn’t like a law, he’d just have it changed.”  In 1984 Congress passed the Secondary Mortgage Market Enhancement Act (SMMEA), which eliminated the ban on private banks selling mortgage-backed securities without a government guarantee.  SMMEA also preempted state restrictions on privately issued mortgage-backed securities; no longer did investment banks have to register with each state to sell them.

The most important part of SMMEA involved the rating agencies, companies that assessed the risk of various bonds.  Under SMMEA, institutional investors who previously were barred from making dangerous investments could purchase mortgage-backed securities as long as they had a high rating from a nationally recognized statistical rating organization.  Investors could outsource their due diligence to the rating agencies; they didn’t have to examine the salary of some home buyer in Albuquerque in order to buy an interest in his loan.  President Reagan signed SMMEA in October; Ranieri showed up for the ceremony.

Next Ranieri secured a tax exemption for pools of mortgages held in a special investment vehicle known as a real estate mortgage investment conduit (REMIC).  The REMIC operated like a trust, able to acquire mortgages and pass income to investors without paying taxes.  Investors would pay taxes only on the bond gains, not on the purchase of the mortgages.  The Tax Reform Act of 1986 legalized the REMIC structure and made mortgage bonds more desirable.

The mortgage-backed securities market reached $150 billion in 1986.  It probably accelerated the demise of the S&L industry, which finally imploded in the late 1980s.  The money used for making mortgage loans, instead of coming from depositors, now came from investors all over the world.  Ranieri and his allies insisted the goal was to free up more funding for mortgages.  He was a dream salesman who just wanted to give every American a piece of something better, a nice house for their families.  But homeownership rates rose nearly twenty points from the 1940s to the 1960s under the old system.  From 1970 to 1990, during the handover of mortgage finance to Wall Street, rates only went up two points.

While Wall Street did well with securitization, it could not dislodge the GSEs from their market dominance.  The GSEs still had that implicit backstop of a government rescue.  Investors valued that and bought most of their mortgage bonds from Fannie and Freddie.  As long as banks tried to compete on a level playing field, packaging carefully underwritten thirty-year fixed-rate loans, they couldn’t win.

Salomon Brothers fired Lew Ranieri in 1987.  He was a victim of his own success.  When the mortgage business standardized, Wall Street investment banks staffed up with Ranieri’s old traders.  Another generation would crack the code and beat Fannie and Freddie, finding a new set of mortgage products to slice and dice.  Ranieri, who started his own firm, never saw that coming.  As he would later tell Fortune magazine, “I wasn’t out to invent the biggest floating crap game of all time, but that’s what happened.”

Once she understood the securitization structure, Lisa Epstein could identify all the component companies and their involvement in her mortgage.  DHI Mortgage was the originator that sold Lisa her loan.  DHI immediately flipped it to JPMorgan Chase, which became the “depositor,” in industry parlance.  JPMorgan acquired thousands of loans like Lisa’s, pooling them into a mortgage-backed security to sell to investors.  To securitize the loans, JPMorgan placed them into a trust (JPMorgan Mortgage Trust 2007-S2), which qualified for REMIC status and its significant tax advantages.  The REMIC forced JPMorgan to add an additional link in the securitization chain–in this case, U.S. Bank, trustee for all the assets in the trust.  U.S. Bank hired a servicer, Chase Home Finance, to collect monthly payments, handle day-to-day contact with borrowers, and funnel payments to investors through the trust.  So Chase had one link in the chain as a depositor and a separate link as a servicer, basically a glorified accounts receivable department.

Investors in the trust get their portion of the monthly mortgage payments, but under the law they’re merely creditors, holders of JPMorgan Mortgage Trust 2007-S2 pass-through certificates; the trustee, the entity passing payments through to investors, owns the loan.  That’s why U.S. Bank, not JPMorganChase, sued Lisa.  JPMorgan Chase gets it proceeds from the sale of the mortgage bonds and walks away.  U.S. Bank earns a fee for administering the trust.  For performing day-to-day operations on the loans, the servicer, Chase Home Finance, gets a small percentage of the unpaid principal balance, along with any fees generated from servicing.  This securitization added an additional wrinkle: the inclusion of Wells Fargo as the securities administrator, with the function of calculating interest and principal payments to the investors.  As this involved scrutinizing cash flow from the servicer, it also made Wells Fargo the “master servicer” on the loan.  When Chase Home Finance informed Lisa that Wells Fargo was blocking mortgage modifications, it probably had to do with this master servicer role.

At no time was it made clear to Lisa that when she sent in her mortgage payment to Chase Home Finance somebody at Wells Fargo crunched the numbers on it and told a colleague at Chase to send the money through U.S. Bank to investors, whether a Norwegian sovereign wealth fund or an Indiana public employee retirement plan.  Heck, nobody told Lisa that DHI Mortgage would grant her a loan and immediately sell it off to a different division of JPMorgan Chase from the one she’d been paying all these years.  This idea of banks trading mortgage payments like they would baseball cards didn’t sit well.  And it made it all the more galling to Lisa that Chase Home Finance would tell her to stop paying: according to the securitization chain, they didn’t even own the mortgage.  Maybe they profited so much off late fees, they wanted to push people into foreclosure.

But while this was all critical information for Lisa to know, it only raised more questions.  She had to understand why securitization translated into suffering for so many homeowners, especially in her backyard.  By 2009, one out of every four Floridians with a mortgage was either behind on payments or in foreclosure.  How was that even possible?  It wasn’t like someone detonated a bomb in Miami and Orlando to wipe out businesses.  No plague triggered all the state’s crops to rot in the fields.  Depressions like this–and Florida was experiencing a depression, in Lisa’s eyes–didn’t happen spontaneously.  Who put this in motion?  Who prospered from the pain?”


DAVID DAYEN is a contributor to Salon and The Intercept, and a weekly columnist for the Fiscal Times and the New Republic.  He also writes for publications including the American Prospect, The Guardian, and the Huffington Post.  He lives in Los Angeles.  This is his first book.”

Chain of Title is a sweeping work of investigative journalism that traces the arc of criminally underreported story in America, the collapse of the rule of law in the home mortgage industry.  By following three victims of illegal foreclosure practices, Dayen humanizes and brilliantly illuminates a vast scam unseen by the public because it’s been indecipherable to everyone but a few industrious housing lawyers–as he shows, even judges don’t understand it.”

Matt Taibbi, author of The Divide

Chain of Title is brilliantly written, superbly researched and scary as hell.  Challenging the idiocy of smug nit-wits that blame the rampant mortgage fraud committed by the nation’s largest banks on deadbeat homeowners greedy for a third bathroom, Dayen deftly unravels the criminal enterprise that cratered the U.S. and global economy.  His account of the fight against the massive injustice that enabled goliath institutions to steal homes to which they didn’t even have a legal claim and whose CEOs escaped with impunity is a rage-inducing endeavor.  But it is also a critical illumination of the rot that still festers at the core of the political-financial establishment.”

Nomi Prins, author of All the Presidents’ Bankers


LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran


About tim074

I'm a retired dairy farmer that was a member of the National Farmer's Organization (NFO). Before going farming, I spent 4 years in the United States Air Force where I saved up enough money to get my down payment to go farming. I also enjoy writing and reading biographies and I write about myself as well as articles and excerpts I find interesting. I'm specifically interested in finances, particularly in the banking industry because if it wasn't for help from my local Community Bank, I never could have started farming which I was successful at. So, I'm real interested in the Small Business Administration and I know they are the ones creating jobs. I have been a member of Common Cause and am now a member of Public Citizen as well as AARP. I have, in the past, written over 150 articles on the Obama Blog ( and I'd like to tie these two sites together. I'm also on Twitter, MySpace and Facebook and find these outlets terrifically interesting particularly what many of these people did concerning the uprising in the Arab world. I believe this is a smaller world than we think it is and my goal is to try to bring people together to live in peace because management needs labor like labor needs management. Up to now, that hasn't been so easy to find.
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