I finally watched The Big Short on Netflix and thought it was very well done. And as someone who was in the mortgage business for many years leading up to the collapse in 2007, it really rang true for me. I saw it from the bottom, as just a broker, but the inevitable bubble bursting was a topic of conversation at the time.



I worked as a broker, on the retail side, and my brother worked both as a broker and as a lender’s rep at different times. He worked for a company called Pinnfund, which at the time was the largest privately-held subprime mortgage lender in the country. We both saw what was going on from our perspective, especially toward the end of the bubble. We knew about the Mortgage-Backed Securities (MBSs) but not about the Collateralized Debt Obligations (CDOs) or synthetic CDOs.

When I first got into the mortgage business, in the mid-late 90s, there was very little subprime lending going on. It was mostly traditional mortgage lending — 20% down, a good credit score, debt-to-income ratios (DTI) of 28 and 36 (28% for the mortgage, 36% total debt), and 30-year fixed-rate mortgages. But then the subprime market took off and kept getting bigger and more risky for the lenders. We were getting loans approved for 90%, 100%, even 125% of the value of the home, for people whose debt ratios were 50 or 60%, sometimes without even verifying income, or with alternative income measures like 24 months worth of bank statements.

I had one customer I did probably 8 or 9 loans for, all cash-out refinances. He owned a bunch of rental properties in Big Rapids, Michigan, most of them with a low loan-to-value (LTV) of 50-60% (meaning on a $100,000 house, his mortgage was only for $50-$60,000). So he would take that up to 90% and pocket $30-40K in cash for each of his houses. We had to use 24 months bank statements for income verification because he ran all of his rent payments through his personal account. All of the loans were 2/28s, meaning they were a fixed rate for the first two years, then they go up after that (theoretically they could also go down, but that almost never happened).

And his credit score was mediocre at best, under 600. And yet time after time the loans would be approved. The subprime lenders we were working with had so vastly expanded their criteria that virtually anyone could get a loan. They were approving $200,000 loans for people I wouldn’t have loaned $5 to. And I found out a year later that this guy had defaulted on every one of his mortgages. He pocketed $300,000 or so and disappeared.

When my brother went to work for Pinnfund, he got a look at how things worked from the lender’s side. As the movie showed, they were bundling up a huge package of mortgages into securities worth $50 or $100 million and selling them for 8, 9, 10 points (so an investor would buy $100 million in loans for $108-$110 million). But the average interest rate on those loans was probably 11.5% or so, which means it doesn’t take much of a default rate for those securities to become worthless. And given the nature of the loans, the default rate was inevitably going to be high.

What we didn’t know about it was that those investors were then protecting themselves through CBOs, packaging and repackaging those securities to spread the risk around. So no one thought they had much skin in the game or much to lose — unless the whole thing came crashing down, which it did in 2007 and 2008. From my vantage point, I knew that something was up. I knew that the investors in those securities were going to lose their shirts, but the money to keep buying them never seemed to dry up, so I assumed I must be missing something. And I was.

When it all came crashing down, the government put up trillions of dollars to save the banks and big investment firms. They wouldn’t do anything to help those who were being foreclosed on, though, arguing that to do so was a “moral hazard” because they wouldn’t learn their lesson and stop taking out loans they can’t afford. Somehow that same logic magically didn’t apply to the banks and investment companies that were working the secondary securities market.

There were 7 million foreclosures during the recession. If the average loan was $100,000, it would have cost $700 billion to buy up each and every loan and forgive it entirely, far less than we spent when you include the backdoor Fed lending to keep the banks afloat. But that wasn’t even necessary. All they needed to do was buy up those bad mortgages and drop the interest rate on them or renegotiate the payment and terms to something the homeowners could afford. Some would inevitably default anyway, but most of them wouldn’t, which means the government would eventually get the bulk of that money back. And that act would also have saved the banks because it would have removed all those bad loans from their portfolio.

The help should have been from the bottom up, not the top down. But those homeowners in foreclosure don’t make billions of dollars in campaign contributions, they don’t have lobbyists and they don’t have legislators on the payroll. So the wealthy got bailed out with taxpayer money while everyone else got royally screwed. Welcome to America.