Every paragraph in Moe Tkakic’s review of The Lost Bank, a new book by Kirsten Grind chronicling the rise and fall of one of the mortgage boom’s most opportunistic operators, is worth pulling out and discussing, but I will limit it to just this one:
At WaMu, the answer was invariably: “fuck reality,” as a 2003 focus group report subpoenaed by Levin’s staff on a product WaMu would market as its “flagship loan”—the Option ARM—demonstrates. Option ARMs, once referred to as “NegAms” for the negative amortization they entail, were a kind of mortgage of last resort—offering struggling borrowers a few years of low introductory payments in exchange for ballooning balances and payments that would often triple when the introductory period expired. They were profitable for WaMu for all the reasons they were toxic to borrowers—high rates, high fees—and additionally, because some quirk of accounting alchemy allowed lenders to book as profit the amount by which customers’ loan balances increased each month. So WaMu’s strategic marketing department convened a few groups of Option ARM borrowers to attempt to divine their innermost thoughts and feelings about their mortgages, whereupon it learned: Option ARM borrowers were for the most part totally ignorant about how the loan actually worked, but had usually been told they were the only loans they qualified for. Negative amortization? “Most [participants] were not very clear on what it was … they generally thought that negative amortization was a moderately or very bad concept.” It was thereby redacted from the official sales pitch.
This kind of entirely predatory mortgage lending is the grist of the muckrakers written in the wake of the financial crisis, the most wide-ranging and comprehensive being Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment. This subject demands to be examined again and again, both because the small-scale details and stories are so heart-wrenching and because we need to get a comprehensive answer to why and how we allowed this type of behavior to persist for so long.
And then there’s another brand of financial crisis book focused on the financial engineering on Wall Street that both accelerated a housing boom by creating an insatiable demand for new mortgages and then turned the inevitable housing bust into the worst financial panic since the Great Depression. The best books in this genre are Gillian Tett’s Fool’s Gold, which traces the development of the exotic credit derivatives that did so much damage to the financial system, and Michael Lewis’s The Big Short, which follows the traders who saw the housing bust coming, and made huge amounts of money betting that it was going to happen.
What’s missing, in my humble opinion, is an account of the financial crisis that can tie together what was going on with the financial markets and what was happening on the ground with Washington Mutual and hundreds of other mortgage lenders spreading the subprime poison throughout the housing market. Of course, plenty of people think they’ve found the answer (Morgenson and Rosner spend a great deal of their book arguing that Fannie Mae and Freddie Mac are the most guilty parties), but any comprehensive and forward-looking reform to our broken system of mortgage origination and still dangerously risky too-big-to-fail banks awaits such a holistic account.