To the Teacher:
Toxic subprime mortgages + robber bankers whipping up belladonna-seasoned ragouts of mortgage-backed securities = a financial meltdown that precipitated an economic bust, causing millions of Americans to lose their homes and jobs. American mega banks— including Bank of America, Wells Fargo, and JPMorgan Chase—were on a frenzied drive for unprecedented profits. But their hasty pudding paperwork, robo-signers, and freewheeling fraud, if not Dillinger-like holdups, devastated the lives of millions of Americans and may ultimately come to a neighborhood theater as "The Great American Robbery."
The two student readings below attempt to make some sense of it all. Two supplementary readings offer excerpts from PBS NewsHour transcripts on how the Harvard Legal Aid Bureau and Boston Community Capital have joined forces in a small-scale, but potent, effort to help people whose homes are in foreclosure buy them back at an affordable price. Unfortunately, this is something the government's weak Home Affordability Modification Program has failed to do for millions of needy people.
Questions for discussion and a proposed student citizenship project follow.
See the high school section of TeachableMoment for "Reforming Wall Street & Its Booms, Bubbles & Busts" for more on the near collapse of the U.S. financial system and some of the deceptive, at times fraudulent, actions of brokers and banks.
Student Reading 1:
Nicole Bradbury, robo-signer victim
In 2003, Nicole Bradbury was living in a trailer with two children when she seized the chance to buy a home in Denmark, Maine for $75,000.
For the first five years she made her mortgage payments. But in 2008 came the housing bubble bust and a severe recession began. Bradley lost her job and the ability to make a $474 monthly mortgage payment. The lender, GMAC Mortgage, foreclosed.
During those first five years, it had seemed as if anyone could buy a house. A buyer might be unable to make a down payment, might have a bad credit history, might not even have a job. None of this mattered. Sign some papers the buyer might not read carefully, or at all, and the family would move in.
The lender had little or no interest in whether the buyer could pay off a loan. In the old days, a bank was the lender. It would examine a buyer's background, require a 20% down payment, and receive monthly principal and interest payments. But those days were gone.
The lender in the new days was often a mortgage broker whose interest was volume, not credit worthiness. Home buyers were enticed and manipulated into accepting subprime mortgages lower than the prime rate. Monthly payments were often only for interest on the loan, but nothing on the principal for the first two years. Then payments rose sharply.
As soon as mortgage papers were signed by a new owner, the broker would sell it to banks which would turn them into mortgage-backed securities. These were bundles of many mortgages banks would then sell to investors worldwide—and make billions.
"The investment banks themselves were running short order operations. More rapid securitization meant more profits. In this process, the paperwork often came as an afterthought. As a result, necessary documents weren't signed, title transfers weren't properly registered... Many of the issuers that dominated the non-prime mortgage market at the peak of the bubble are no longer in business. They probably did not make sure that all the documentation went to the right place before they closed their doors." (Dean Baker, "Foreclosure Moratorium Is Only Sane Response to Shocking Wall Street Mortgage Scams," www.alternet.org, 10/18/10)
Bankers, economists, and top government officials, with few exceptions, saw no end in sight for ever-rising home prices, even when they were clearly in sight by 2007. In 2008, the housing bubble burst, and home prices plunged, swallowing the jobs and homes of millions of Americans like Nicole Bradbury. Mortgage payments ballooned. Getting out of financial trouble by selling your home for a higher price than you had paid was impossible because those prices had collapsed. And lenders did not have much interest in a federal mortgage modification program, especially if the borrower did not have a job.
Servicers of home loans, usually banks, began foreclosing on and seizing homes. Nicole Bradbury told her story to the nonprofit Pine Tree Legal Assistance. Thomas Cox, a retired volunteer lawyer for the group, quickly discovered that Jeffrey Stephan, a "limited signing officer" had been the GMAC employee who approved the documents for the Bradbury foreclosure.
Stephan admitted in a deposition "that he had prepared 400 foreclosures a day for GMAC and that contrary to his sworn statements they had not been reviewed by him or anyone else." In short, he was a "robo-signer," a new term for people in the foreclosure business who sign as fast as they can papers they do not read—or allow others to forge their signatures.
Judge Keith Powers of Maine learned from Cox about the GMAC robo-signer. Then he received amended documents that did not even include the street address of the Bradbury house. As a result, he rejected GMAC's request for a foreclosure without a trial. He ordered a trial to take place this winter. A flood of court cases around the country suggests there will be plenty of other trials like this one.
The seriousness of this situation is becoming clear. Recently Obama officials "acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages..." (Yves Smith, "How the Banks Put the Economy Underwater," www.nytimes.com, 10/31/10)
Meanwhile, Nicole Bradley and her two kids are living on food stamps and welfare. She hopes to get her pickup fixed and find a job. But unfortunately jobs are now very hard to come by. "'I am not leaving,' she said..., 'We have nowhere to go.'" (David Streitfeld, "From This House, a National Foreclosure Freeze," www.nytimes.com, 10/15/10)
1. What questions do students have about the reading? How might they be answered?
2. Why were people like Nicole Bradbury so easily able to buy homes?
3. Why didn't mortgage brokers care whether customers could afford a house?
4. What is a subprime mortgage? Why did brokers want to sell them to anyone?
5. What did banks do with such mortgages and why? Why were bank records, in many cases, maintained so poorly?
6. What was Jeffrey Stephan's job?
7. Why did Judge Powers rule for Nicole Bradbury?
Student Reading 2:
Bankers' sloppy and illegal work
Stories even worse than those about robo-signers have emerged. Paul Krugman reports in The New York Times that "a Florida man's home was taken even though he had no mortgage." ("The Mortgage Morass," www.nytimes.com, 10/15/10).
"If you stay in your home, your mortgage lender may break in," reporter Amy Goodman suggests. "Nancy Jacobini of Orange County, Fla., was inside her home when she heard an intruder. Thinking she was being burglarized, she called 911. Police determined the intruder was actually someone sent by JPMorgan Chase to change the locks. And Jacobini wasn't even in foreclosure!" ("When Banks Are the Robbers," www.TruthDig.com, 10/20/10)
Since March 2009, more than five million property owners have received a foreclosure notice or already lost their home, according to Realty-Trac, which keeps a record of foreclosure listings. No one knows how many banks have presented courts with improper documents for foreclosure notices and home losses or how serious their flaws may be.
When this latest mortgage and bank scandal broke, Bank of America (BOA), the nation's largest bank and servicer of about 20 percent of U.S. mortgages, announced a freeze on foreclosures. Ten days later, BOA maintained that it had not found a single error in foreclosure notices in 23 states and that it would now file 102,000 new ones. A week later it acknowledged some mistakes that "included improper paperwork, lack of signatures and missing files, as well as cases in which information about the property and payment history were unmatched," but no "evidence of wrongful foreclosures." (Reuters, 10/25/10)
Attorneys-general in all 50 states and the District of Columbia are conducting investigations into whether people have been unfairly evicted. Business columnist Joe Nocera says, "they hope to use their investigation as a cudgel to force the big banks and servicers to do something they've long resisted: institute widespread, systematic loan modifications." This is something that the Obama Treasury Department "has failed miserably" to do, he writes. ("The States Take On Foreclosures," www.nytimes.com, 10/30/10) Foreclosures are at record highs and remain one of the major causes of a weak American economy.
BOA also faces threats of suits from investors, including the New York Federal Reserve, unless it buys back billions of dollars worth of mortgage-backed securities. "Mainly, they are saying that Bank of America was servicing loans in these bonds the bank knew violated the...standards that investors had been led to believe the bank was conforming to...
"Having convinced millions of Americans to buy homes they couldn't afford, Bank of America is now reving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of those same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans." (Joe Nocera, "Big Problem for Banks: Due Process," www.nytimes.com, 10/23/10)
If BOA and other banks do not buy back these "junky loans," taxpayers will receive the bill for the sale of mortgage-backed securities bank officials knew—or at least should have known—were backed by homeowners who couldn't afford their mortgages.
But that isn't all. The biggest culprit in the immensely profitable subprime mortgage/ mortgage-backed securities bust was Countrywide Financial, the nation's largest mortgage lender during the housing boom. It also turned out to be a firm whose leaders hid the risks they were taking, lied to investors, and committed frauds. After the housing bubble burst, its fortunes plunged because of toxic loans it had made. Bank of America bought the crippled firm.
Countrywide's chief executive was Angelo Mozilo. In e-mails written starting in April 2006, he criticized his company's lending practices to other executives at the same time that he was publicly boasting about his company's high-quality loans and privately cashing in $140 million worth of his shares in the company.
E-mail from Mozilo to David Sambol, president of Countrywide, referred to no-money-down loans for houses to borrowers with bad credit histories: "In all my years in the business, I have never seen a more toxic product." In other e-mails, Mozilo writes about "deterioration in the quality of loans" and says of subprime second mortgages, "I consider that product line to be the poison of ours."
The Securities and Exchange Commission (SEC) charged Mozilo, Sambol and one other executive with civil fraud, but settled out of court. The accused neither admitted nor denied the charges against them. Mozilo agreed to a $67.5 million fine, most of which will be paid, along with his legal fees, by Bank of America or Countrywide. He also accepted a permanent ban on serving as an officer or director of any public company. Between 2000 and 2008 Mozilo collected $521 million in compensation from Countrywide.
Earlier this year, Goldman Sachs settled SEC securities fraud charges for a $550 million fine. The SEC is also investigating possible fraud by former senior executives at Merrill Lynch. (Gretchen Morgenson, "Lending Magnate Settles Charges for $67 Million," www.nytimes.com, 10/16/10)
"Inside Job" is a new documentary about the housing boom and bust that brought unemployment and foreclosure to millions of Americans. Its narrator, Matt Damon, declares that America has been robbed by insiders who "destroyed their own companies and plunged the world into crisis" and then "walked away from the wreckage with their fortunes intact."
1. What questions do students have about the reading? How might they be answered?
2. Why are attorneys-general across the country and the Federal Reserve investigating the ways in which banks have handled foreclosures?
3. Why are Bank of America and other banks faced with suits by angry investors? Investors in what?
4. Why did the SEC charge Mozilo and others with fraud?
5. How are these cases being settled? Do these settlements seem reasonable to you? Why or why not?
Two Supplementary Readings
"Boston Group Helps Homeowners 'Stand Up, Fight Back' Against Foreclosure"
Excerpted from transcript of the PBS NewsHour, October 19, 2010
JIM LEHRER: NewsHour economics correspondent Paul Solman reports on a fight against foreclosures in Boston.
WOMAN: Good evening. My name is Deborah Cox. And I'm in foreclosure.
PAUL SOLMAN: More than two million Americans are in Deborah Cox's shoes, or Nowi Juwome's.
WOMAN: Nowi Juwome. The house is in foreclosure.
PAUL SOLMAN: A disproportionate number of foreclosed-on Americans are black or Hispanic, according to a recent Princeton study...
PAUL SOLMAN: But the movement to resist is growing and has been given a swift lift by the news that foreclosure paperwork was either flawed or fraudulent. At the weekly meeting of Boston nonprofit City Life Vida Urbana, which been organizing foreclosure resistance for years, the mood is now more defiant than ever.
MAN: And I ain't going nowhere!...
PAUL SOLMAN: City Life mounts public resistance to the eviction of foreclosed families....They call their approach the sword, physical activism.
A sample from the City Life website (citylifevidaurbana.blogspot.com):
Monday, Sept. 13 - A day of struggle against the banks. City Life and the Bank Tenant Association plan TWO protests to defend their members against bank evictions.
When: Monday, September 13
Time & place: 9 am, 8 Inwood St., Dorchester for eviction blockade to defend Martin Ovalles 6:30 pm, 48 Mansfield St., Everett for the vigil to defend the Dumerant Family
Visuals: Large banners and signs. Street theater featuring a piggy bank knocking on fake doors of homeowners
PAUL SOLMAN: The sword is step one of a three-step program. Step two, the shield, free legal help to drag out the process for people like Micheline Champagne.
MICHELINE CHAMPAGNE: They have sent me notices....I opted to take them to court.
PAUL SOLMAN: Step three is the offer, to buy back the foreclosed house and resell it at current market value to the homeowner, like Pamela Nichols.
PAMELA NICHOLS: And I will be closing on my home. I'm getting my home back. And I will be closing on October 22...
PAUL SOLMAN: In Cambridge, step two of the program, the shield, wielded by students at the Harvard Legal Aid Bureau...
MAN: But the main message we try and get across is, one, you have significant rights. You don't have to leave your house right now.
PAUL SOLMAN: They break up to go door to door, using a published list of those newly facing foreclosure in the Boston area.
DAVID GROSSMAN (director, Harvard Legal Aid Bureau): We get the listings, because it's public record, of every upcoming foreclosure auction. And we head out and knock on doors.
And, so, to the average person, we may look like just another set of scammers, so we have to overcome that initial skepticism in order to persuade them that, yes, we're really on their side. We're building a real movement. We can help you resist, and we're not going to take any of your money. It's all free.
WOMAN: After your home is foreclosed, City Life and our legal shield protect you. And... we work to prevent an eviction.
PAUL SOLMAN: The shield's goal, to drive up litigation costs for the mortgage holder, so it eventually agrees to step three: sell back the house to its owner. The news of flawed or fraudulent paperwork is a powerful new weapon in their arsenal.
See http://www.pbs.org/newshour/bb/business/july-dec10/foreclosures_10-19.html for the complete transcript and video of this report.
1. What questions do students have about this reading? How might they be answered?
2. Why do you suppose that "a disproportionate number of foreclosed-on Americans are black or Hispanic"? If you don't know, how might you find out?
3. How and why is City Life Vida Urbana fighting foreclosures?
4. Explain each step in the Boston fight-the sword, the shield, sell house back to its owner.
5. Why and how does the Harvard Legal Aid Bureau work to drag out the process?
"Boston Firm Offers Homeowners a Second Chance After Foreclosure"
Excerpted from transcript of PBS NewsHour, October 20, 2010
PAUL SOLMAN: Prudhomme and Pierre Dumerant and family are fighting to stay in the Boston area home they bought back in 2004. Unable to make the mortgage, they were foreclosed on by GMAC, which held the loan, and is reviewing foreclosures in 23 states due to faulty, if not fraudulent, paperwork.
But GMAC sold the loan. The Dumerants still face eviction.
PRUDHOMME DUMERANT, homeowner: We leave it up to — you know, up to the Lord. You know, But we don't have a place ready yet to go.
PAUL SOLMAN: The Dumerants are part of a three-step movement in Boston, step one, public protests like this staged by neighborhood activist City Life Vida Urbana. Step two is litigation, courtesy of Harvard Legal Aid, to drag out the process.
Dave Grossman directs the legal effort.
DAVID GROSSMAN, director, Harvard Legal Aid Bureau: We could stop banks. We could beat banks up and stop them from evicting people after foreclosure, but they still owned the property. And that wasn't a stable equilibrium.We had to find an endgame. We had to find someone to buy the property back. And the obvious solution was let the former owner buy the property back.
PAUL SOLMAN: Enter BCC, or Boston Community Capital, the crucial third step of the program. It's tackling a problem millions of underwater homeowners face. They could afford a market-price mortgage, but their banks foreclose instead, though they will have to sell at market price anyway.
ELYSE CHERRY, CEO, Boston Community Capital: If we can find a borrower that is someone in a home who's in the process of being foreclosed upon who has the ability to pay a mortgage at roughly market rate for that home, then we go out to the owner of the property or the servicer, whoever it is that has charge of the mortgage and we negotiate, or we attempt to negotiate a purchase from that entity. Once we have bought, then we can turn around and sell back to the homeowner.
PAUL SOLMAN: The bulk of BCC's funding comes from investors and foundations, along with some government money. First, BCC buys a property at roughly market value, typically half or less of what the foreclosed homeowner owes.
Second, BCC sells it back to the homeowner with a 30-year mortgage at about 6 percent at the moment, marking up the purchase price by 25 percent as a cushion against default. To further insure that its investors get their money back, BCC's evaluation is tough. Less than half of homeowners qualify.
ELYSE CHERRY: They are mortgages that are paid every two weeks. In fact, what we have done is to tie it to people's paychecks. We require automatic deposit of the paycheck and automatic withdrawal of the mortgage.
PAUL SOLMAN: These are pretty stringent terms.
ELYSE CHERRY: Yes. But there's another piece to it. We have put onto this something that we call a shared appreciation mortgage. And, in simple terms, what that really means is, should the market come back, someone who has financed with us and is now paying roughly half of what they would have paid in the past will actually only be entitled to roughly half of what that appreciation is.
PAUL SOLMAN: Since the program began at the beginning of the year, BCC has financed 90 properties. Not a one has defaulted. Pamela King's is typical.
PAMELA KING, homeowner: The value of the properties had gone down, so I was, like, owing 50 percent more than the property was worth. And when I found out that they could buy it back at the true cost, you know, I was just thrilled.
PAUL SOLMAN: So, what was your old payment per month, and what's the new one?
PAMELA KING: It was like $3,500. And the new one is closer to $1,600.
ELYSE CHERRY: Right now, nobody believes that you can lend to people who are in foreclosure and get your money back, right? Part of what we're about is proving that to be untrue. I think that the critical reason that people fail to pay is because the mortgage that they had and the monthly payment that was required from them was much higher than their income would allow...
PAUL SOLMAN: Cherry says 90 percent of BCC's offers are accepted.
ELYSE CHERRY: Typically, what a lender would want is to be able to sell in the short term at the best possible price. Our job is to persuade the lender that the price we're offering is the best price for a distressed property in that neighborhood...
PAUL SOLMAN: How typical is Boston Community Capital of organizations like that, community development finance institutions?
DAVID GROSSMAN: They're the only CDFI (Community Development Financial Institution) in the country who's been willing to step up and play the role that they have here in trying to solve the foreclosure crisis in Boston. And, as a result, we have been able to save more people's homes than any other city in the country.
PAUL SOLMAN: But, if it's such a wonderful model, why aren't they doing it in other cities?
DAVID GROSSMAN: They're worried about the risk involved. BCC, by definition, in the program, is — is financing people with very poor credit, people who have just gone through foreclosure. Everyone in the program is either in foreclosure or has gone through foreclosure. And from normal underwriting standards, those are people you don't underwrite.
PAUL SOLMAN: But, through stringent terms and vigilant vetting, Boston Community Capital has been able to lend.
See http://www.pbs.org/newshour/bb/business/july-dec10/banker_10-20.html for the complete transcript and video of this report.
1. What questions do students have about the reading? How might they be answered?
2. What is the role of Boston Community Capital in its fight to defend homeowners from foreclosure and to enable them to buy their homes?
3. In what ways are BCC's terms "stringent" for reselling homes to owners?
4. How successful has the BCC program been? Why?
How serious is the foreclosure problem in the towns and neighborhoods where
students live? What information is available from homeowners? Town records?
Officials? Real estate firms?
What, if anything, are officials doing to help people stay in their homes?
What town or neighborhood organizations, if any, are working on this problem?
Such projects give students many opportunities to learn such important skills as working well in small groups; asking good questions; interviewing effectively; gathering and keeping track of information from multiple sources; and thinking critically.
This lesson was written for TeachableMoment.Org, a project of Morningside Center for Teaching Social Responsibility. We welcome your comments. Please email them to: email@example.com.