Inside the Mortgage Crisis: Lifting the Curtain on Subprime
This past Sunday, NBC News’ Chris Hansen kicked off a three-part series “Inside the Financial Fiasco” on Dateline. The first part takes a look behind the curtain of the mortgage crisis. Hansen gave OTM an exclusive first look on Friday at what went so terribly wrong in the subprime business that was the first shoe to drop in the economic disaster.
Hansen speaks to James Laliberte, chief operating officer of People’s Choice, a subprime lender that filed for bankruptcy in 2007. Laliberte, a whistleblower with a front-row seat to the meltdown, told Hansen of the company’s penchant for pushing stated-income loans, where they did not have to verify how much the borrower actually made. That led to housekeepers reporting $11,500 in income; carpenters reporting $12,700; massage therapists claiming $15,000.
People’s Choice commissioned an internal survey in 2005, according to Laliberte, where a third of employees who responded said they had witnessed “breaches” of “laws and regulations” at the company. One in 10 said they had been asked to do fraudulent things themselves. (The company's CEO said the company did "everything it could to prevent abuse" in a statement to NBC).
Hansen explains that in his investigation he found both lenders and borrowers at fault – both were guilty of jacking up income in different cases. For borrowers, it was an easy way to get a loan. For lenders, the more mortgages they could get through, the more commission they made. Plus, the loans were being sold and packaged as investments to Wall Street anyway, so what did they care if they went bust? Hansen describes the subprime industry as the “match that lit the fire” of the economic crisis. When borrowers defaulted on their mortgages, home values started to fall, foreclosures increased and the problem snowballed to where we are today.
John Ulzheimer, our resident credit and debt expert, says he is all but sure that the subprime contagion will come back “full force” in 24-36 months. There is simply still money to be made, he says, and lenders and borrowers both have short memories.