'If you had a pulse, we gave you a loan'

In Miami, Fla. last fall, sheriff’s deputies showed up at Junior Alvarez’s house to evict him and his family. That was just one of 3.2 million foreclosure-related actions last year.  “We tried to save the house,” a shaken Alvarez said, “but it was too much.”

“Too much” is a phrase being uttered by Americans in all walks of life these days. A six-month Dateline NBC examination of the origins of the economic crisis found plenty of blame to go around, and few people willing to step up and acknowledge their culpability. 

Since taking office, President Barack Obama has been stressing the need for accountability, not simply to “lay blame,” as he put in his speech before both houses of Congress in February. “It is only by understanding how we arrived at this moment that we’ll be able to lift ourselves out of this predicament,” he said.

Understanding how we got here is simultaneously simple and complex. Simple, in that the root causes can be traced to excesses in the multi-trillion-dollar mortgage industry.  Complex, because the greed that permeated the industry was driven by some of the most arcane financial instruments ever devised by Wall Street. Those instruments, mainly derivatives of mortgage-backed securities, became so convoluted that instead of lowering financial risk, as they ostensibly were intended to do, they actually expanded and obscured it.

In the old days, a mortgage was relatively straightforward. A bank agreed to lend you money to buy a house, and the property was collateral for the loan. Banks were conservative in their lending because they expected to be paid back with interest.

In order to qualify for a mortgage, until 1956, borrowers needed a 20 percent down payment. From the 1920s to the 1950s, the rate of home ownership in the U.S. hovered around 50 percent.

But then came a succession of laws that eased lending and eventually expanded home ownership dramatically. Among the key changes: Fannie Mae, created in the 1930s, was transformed in 1968 into a government-guaranteed agency buying mortgages from lenders and providing an enormous supply of funds.  It was joined in 1973 by a similar agency, Freddie Mac.

The advent of the CDO
But some say the real fuel for the boom in home ownership came from Wall Street, which found innovative ways to invest in mortgages. In the 1980s, investment banks began marketing mortgage-backed securities, bonds built from thousands of loans bundled into one instrument that paid interest to investors. The money raised from selling those bonds added to the flow of funds to mortgage lenders, who in turn were able to make more loans.

Then, Wall Street came up with a new type of security called a collateralized debt obligation (CDO), which pooled the risks from mortgage-backed securities and other debt. The little-regulated securities brought hundreds of billions of dollars more into the system.

It was that infusion of money, plus provisions of the Community Reinvestment Act, passed in 1977 and amended in the 1990s, that ignited the housing boom. By 2004, home ownership reached nearly 70 percent. As Sen. Chris Dodd D-Conn., commented before his colleagues, “in no small measure… because of the work that's been done here.”

But the system became so lax that nearly anyone could qualify for a loan. And it reached the point where lenders did not ask for a down payment at all.  They were willing to lend 100 percent of the purchase price, usually split into two loans: one for 80 percent of the value; the second for 20 percent.

Take the case of Paula Taylor, a personal trainer, who said she grew up poor near Boston and was one of the first in her family able to buy her own home.  In 2006, she said she was virtually homeless, living out of a suitcase, sleeping on the sofas of family members and friends.

She was looking to rent an apartment, but then a realtor showed her a condominium for sale in a renovated house in Roxbury, Mass. 

She was put in touch with a loan officer at Countrywide Financial who took her information.  She knew she might have a hard time qualifying, but said she did not really understand a lot about the mortgage process.  “I knew that you give them your information.  And they run the numbers, and they tell you whether or not you can afford it.”

At the time, her income was somewhat erratic and amounted to less than $20,000 a year, she said.  But somehow her loan application listed her income as $7,300 a month – $87,600 a year, more than four times her real income. 

Countrywide issued her two mortgages to cover the full purchase price: $259,900. The first mortgage was for $194,925 with an initial interest rate of 8.625 percent, fixed for two years, then adjustable.  The second mortgage, in the amount of $64,975, had a much higher interest rate: 11 percent. 

The combined monthly payment for both loans was more than $2,100, well above her average monthly income of $1,600.

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