http://www.rollingstone.com/politics/blogs/taibblog/lurid-subprime-scams-unveiled-in-long-running-fraud-trial-20131212
[On-line article includes multiple videos and links.]
Lurid Subprime Scams Unveiled in Long-Running Fraud Trial
By Matt Taibbi
POSTED: December 12, 4:20 PM ET
Lost amid the hoopla over JP Morgan Chase's record-setting $13 billion
settlement this fall was news of another monster court resolution – a
$2.46 billion judgment, the largest ever awarded after trial in a
securities fraud class action case, handed down in October against a
HSBC acquisition called Household International.
It's an old case, with the trial completed way back in 2009 and the
fraud in question having all taken place between 1997 and 2002. But it
has crucial ramifications for the present, for one key reason:
The evidence uncovered in the Household suit should put to lie once and
for all the oft-repeated myth – spread by many of America's most notable
dumb people, from Rush Limbaugh to New York City Mayor-unelect Mike
Bloomberg – that the financial crisis was caused by the government
"forcing" banks to lend to poor people.
In reality, of course, the subprime bubble exploded because financial
companies and banks were in a mad rush to get as many iffy borrowers
into loans as quickly as possible – and not because they were forced to,
but because they made assloads of money doing so.
Nowhere was that more in evidence than in this case, Lawrence E. Jaffe
Pension Plan v. Household International, Inc., et al., where a major
trafficker in subprime and "alternative" mortgage products schemed in
every conceivable way to get low-income, high-risk borrowers into as
many dangerous mortgages and refinance deals as they could.
Thankfully, the principals in this case left behind a treasure trove of
amazingly disgusting videos and internal memoranda showing in graphic
detail an elaborate, company-wide plan to herd unsuspecting high-risk
borrowers into bad loans. We can share some of that evidence here, with
particular emphasis on the firm's "training videos," and I can pretty
much guarantee that some readers may actually vomit with rage when they
watch them.
Some background: The suit against Household International, a major
home-loan purveyor that earned $75 billion from loan securitizations in
1999-2002 (and which was swallowed up by HSBC in 2002) originally began
as a stock fraud case. Among other things, Household was disguising the
toxicity and instability of its loans using a wide assortment of
improper accounting schemes, which in an Enronesque touch were used to
argue to the markets and to potential stockholders that Household was
putting up record sales numbers.
These accounting tricks included a preposterous technique called
're-aging,' in which company bean-counters would declare delinquent
loans to be no longer delinquent, by magically resetting the clock on
the borrower's payment history under certain conditions (thereby
're-aging' the delinquency).
Using this and other sordid bookmaking techniques, they could then claim
that they had more well-performing loans than they really did. This
tricked shareholders into believing that the company's loan portfolio
was stronger than it was.
Way back in 2002, numerous major investors in Household, including
several pension funds, sued the company for violations of securities
laws. The plaintiffs back then could have had no idea they would spend
11 years in court, and that their case would end up uncovering evidence
of behavior that would play a key role in inflating a worldwide
speculative bubble in the mid-2000s, and crashing the U.S. economy in 2008.
A Chicago jury ruled against the firm in May 2009, and the award was
announced a little over six weeks ago this year. It got a little press
attention, but a lot of the most damning evidence hasn't made it into
the media, and some of it is stuff that really needs to be seen to be
believed.
Just to give one example, Household had a particularly disgusting scam
going – they called it the "EZ Pay Plan."
In it, customers were urged to junk their old (and presumably safe)
mortgages and switch to a new Household Refinance plan that would be
both more expensive and more dangerous, using a little sleight of hand.
Among other things, they told customers they could save money and reduce
their interest rate by switching from a monthly payment plan to a
biweekly payment plan.
There were two things going on here. One – and this is so sleazy it's
almost funny – by getting customers to make payments biweekly instead of
monthly, they would essentially box borrowers into making an extra
payment every year (remember, there are 52 weeks in a year).
The other is that the company was using word games to try to tell people
they would be paying lower rates, when in fact they would not be.
Typically what that involved was getting them into loans that not only
demanded more payments every year, but also paid off much earlier (say,
in 18 years instead of 30), forcing the borrower to come up with a lot
more money a lot sooner. Naturally, because the customer is paying off
his or her loan faster, he or she ends up paying less interest overall.
But the Household pitch would be to describe this as a loan that,
because you're paying less interest overall, was "like" paying a lower
interest rate on a long-term loan, when in fact the customer usually
ended up paying a shorter loan at a far higher rate. As predatory
schemes go, it's a pretty slick pitch.
"It's actually sort of ingenious. I wouldn't have thought of it," says
Dan Drosman of the San Diego-based Robbins Geller Rudman & Dowd, the
firm that served as lead counsel for the plaintiffs for the last 11 years.
Household scammed customers in many different ways. They concealed
prepayment penalties, offered phony "discount points," and used a
variety of techniques to increase the amount of money borrowed against
customers' homes. The latter mechanism had the effect of lowering the
equity people had in their houses, making it difficult and in some cases
impossible for people to refinance with other companies once they
realized that they'd stepped into a deadly trap with Household
(literally so: Household called their sales pitch the "trap sale").
All of which brings us to a remarkable series of training videos. The
following set of clips was put together way back in 2001 by one of the
executives of Household, a creature named Dennis Hueman. In it, this
hollow-eyed, suburban-Skeletor-looking sales-creep talks about how to
snare people into falling for Household's dirty loan schemes.
In this first clip, Hueman, who was in charge of the entire Southwest
division of Household, tries to get his sales staff in the selling mood
by telling them a folksy story. He compares the process of getting
customers locked into predatory deals like the EZ Pay "bimonthly
payment" scam to fishing, telling a story about going lake fishing with
his seven-year-old.
His son, he says, dutifully casts his reel out into the water and lets
the bobber float, waiting for a bite. But then, about a minute into this
clip, Hueman describes his son yanking the rod back fiercely – "he
thought he was on Field and Stream" – as soon as he sees the bobber move.
Of course, when the overanxious boy reels the line in, the hook is empty
and even his bait has been washed away. Punchline: Hueman's son is a
crappy salesman!
Father Hueman sagely explains: when fishing, it's much better to be patient:
Now, good fisherpeople know, if you're gonna go out and fish,
you've gotta take and put the bait on your hook, and you've got to cast
it out there. Now that bobber's going to go down once. When it goes down
once, you say, I'm just fine with that, I'm going to be patient . . .
You wait until the bobber goes all the way under, all the way under, and
the line is nice and firm, and that fisher-person will take and bring in
that fish.
Watch at around the 1:45 mark:
Look back also at around 2:15 of that same clip. There, Hueman explains
that there's even a little sadistic pleasure that may be had in reeling
a fish in, if you're patient enough.
When you take your time and make sure the fish is all the way on the
hook, Hueman says, you can play around with your catch on the way back
to the boat:
Don't have to worry. You can even play around with it a little bit.
I've seen people, they have their catch on, they even prolong it. They
have some fun with it.
Hueman will go on in these videos to explain exactly what language to
use to get people to agree to sign on to loans that are actually more
expensive and more dangerous than the ones they already have, something
no rational customer would do if he or she were actually getting the
straight story.
Why is this deception necessary? Hueman himself explains it in this next
video.
In it, he compares the sales pitches of his company to those of a
fictional competitor, "Billy Bob Brokerage Firm." He explains that Billy
Bob's salesmen are going to snare their catch by talking about lower rates.
But at the very end of this clip, at about the 3:11 mark, Hueman
explains why Household can't use the same pitch as Billy Bob's company.
Why? Because Billy Bob's rates are actually lower than Household's:
I'll be quite honest with you, folks. I think our pitches sound
exactly like the pitches that are happening over at Billy Bob's shop.
The only difference is, we're selling an 11 percent rate, and Billy Bob
is selling an 8 percent rate. So if our pitch is exactly the same . . .
. I don't think we're going to win a whole lot.
Here, watch for yourself:
So given that Household couldn't sell their wares by honestly comparing
rates with the competition, they had to come up with another, less
direct way to reel in those fish. That leads us to the last video, where
Hueman lays out the technique he calls the "trap sale." He introduces
that term just 15 seconds into this video:
He goes on to role play a "trap sale" with another person. Here's how it
works. He begins by simply asking the customer a question: On your first
mortgage, with Countrywide, what was the interest rate? (The "customer"
says it was eight percent.) And was that a 30-year fixed mortgage? (The
"customer" nods bashfully.)
Hueman then winces, like he's smelling rotting cheese, at the news that
the poor customer is paying 8 percent over 30 years. He asks, in
mock-amazement: You're paying 8 percent over 30 years? Really? And the
customer says yes once again. Now Hueman switches to his pitch (watch
from 4:05 on):
Let me ask you a question on your Countrywide mortgage. If your
mortgage company, Countrywide, were to take and lower that down to 2.37
percent for you, if they were to take it and lower it down to 2 or 3
percent fixed, no gimmicks . . . would you take it?
The customer says yes. Hueman then explains to the "customer" that
Household has a product that would make that big bad interest problem go
away (watch from about 5:05 on):
We have a product here, it's a non-standard loan product, and what
that means is that I can show you how to repay that debt so that it
would pay out cheaper than a 2.5 percent fixed 30-year mortgage . . .
See the semantic trick? Hueman offers a hypothetical scenario (If
Countrywide were to offer you . . . would you be interested?) that makes
the customer think he's getting offered a lower 30-year fixed rate.
Hueman then offers a "non-standard loan product" that would "pay out
cheaper than a 2.5 percent fixed 30-year mortgage," by which he means
there's less total interest than such a mortgage.
But he's not actually offering a lower interest rate. He's tricking the
customer into taking a shorter loan where he'd pay more cash upfront.
And then he's enjoying reeling his catch in.
There's lots more damning evidence in the case.
The firm also hired as a consultant a legendary credit-industry villain
named Andrew Kahr. Kahr briefly became infamous for practices at a
credit card giant named Providian thanks to a lawsuit filed over a
decade ago against that company, in which all sorts of damning
statements were uncovered. Among other things, Kahr wrote in an internal
memo that in the credit card business, the "problem is to squeeze out
enough revenue and get customers to sit still for the squeeze."
As a consultant for this home-lending company Household, Kahr wrote a
series of memos with suggestions for various practices, including the
bi-monthly plan. Later, the firm attempted (with some success) to delete
these memos prior to litigation, but some of them survived and they're
revolting.
Just as he had at Providian, Kahr stressed getting people into loans and
then keeping them in those loans – "sitting still" if you were – for as
long as possible. Among other things, he talked about imposing
frightening prepayment penalties that would be high enough to keep
people on the rolls. "Six months' interest is not enough to discourage
prepays in all circumstances," he wrote. "Even 12 months might not be
[enough]."
"So we can target prepayments approximately equal to zero as a goal," he
added. "We should certainly aim at forestalling all prepays – and
getting mortgage brokers including ex-employees off our backs."
In the same memo, Kahr talks about imposing late fees at the highest
allowable levels, and notes cheerfully that if the deals are struck
correctly, customers are often clueless about the size of the penalties
they'd agreed to pay in the event of lateness. "In recent years, late
fees in credit cards have doubled, in some cases tripled," he writes.
"It has turned out that customers are not sensitive to these fees,
either in accepting the loan or when they incur the fees."
Not many rational people these days will deny that predatory lending
goes on. But there are still a great many people who refuse to see
subprime mortgage customers as victims in the crash drama.
Despite reams of anecdotal evidence that banks and finance companies
schemed incessantly to get people into dicey alternative loans – loans
that became the fodder for securities that would then be sold to another
set of victims, the investors in mortgage-backed bonds – many refuse to
believe that people who defaulted on their home loans or went into
foreclosure weren't themselves at fault somehow. The underlying instinct
is to blame people for not being rich enough to pay off their lenders.
But cases like Household underscore the fact that many subprime
borrowers were led straight into the debt buzz-saw by companies that
were actively trying to "squeeze" every last bit of revenue out of their
clients. There were people who qualified for prime loans who got nudged
into more lucrative alternative loans, and people who had simple 30-year
fixed mortgages who found themselves frantically trying to pay off
unforeseen penalties that had intentionally been hidden from them during
the sales process.
The people who sold these products reside very near the apex of human
assholedom, and there were quite a lot of them, which unfortunately led
to a worldwide financial crash. On what passes for the bright side, many
of them were stupid enough to leave behind records of their sleazy
practices for history. So hopefully, at least, there won't be any more
illusions about what went on.
======================================================================
For more reading by this writer:
http://www.rollingstone.com/politics/blogs/taibblog
--
Darryl McMahon
“Yesterday I was clever, so I wanted to change the world.
Today I am wise, so I am changing myself.” ― Rumi
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