Homewreckers: Book Review
Homewreckers: How a Gang of Wall Street Kingpins, Head Fund Magnates, Crooked Banks, and Vulture Capitalists Suckered Millions out of Their Homes and Demolished the American Dream (2019), Aaron Glantz. Back to the Subprime Meltdown of 2008. Unlike the dozens of other books, this covers the sleazy details since the debacle and recovery. New crooks took over to make a new bundle off the people already hurt in the housing crisis (plus others). Interestingly, many of the vultures (and others) make the daily news: Trump and his real estate gang that includes Steven Mnuchin, Wilbur Ross, Michael Cohen, plus Fox News' Sean Hannity. Add mostly obscure names like Tom Barrack who made a fortune buying up savings and loan debt and real estate after the S&L crisis of the 1980's, roughly duplicated after 2008. Of course, he was a Trump friend. Money laundering seemingly originates from around the world. I've read and wrote about the various schemes, but this book puts names and dates on specific transactions, including those of well-known modern robber barons, many of which are affiliated with the Trump administration. "The Homewreckers aren't sadists. They don't particularly enjoy inflicting pain. They are businessmen who value money first and foremost and have a special gift for seeing opportunity in the misfortune of others" (p. 272). Much of the book focuses on a single victim, Sandy Jolley, whose parents were sold a predatory reverse mortgage. Although the house was foreclosed after her parents died, she didn't give up and helped others in the same boat. She became a whistle-blower against these abuses. Lawsuits followed. She eventually collected a net (after lawyers) of $978,000 under FIRREA.
Chapter 1 introduces how an older couple were sold a predatory reverse mortgage by Financial Freedom (acquired by IndyMac) and the repercussions which essentially ruined the family and the house ended up in an anonymous LLC. Chapter 2. Subprime and Alt-A became increasingly important for mortgages, and increasingly corrupt. The New Deal of FDR created the Home Owners' Loan Corporation (HOLC) to buy bad loans off banks, then modify or reissue these mortgages; the law created the 20% down and long-term fixed loans. Further acts included the National Housing Act creating the Federal Home Administration and later the Federal National Mortgage Association. Economist and former Federal Reserve Board member Alan Blinder suggested a new HOLC after the subprime crash. It went nowhere: "[Congress] didn't understand the difference between lending money and spending money" (p. 26).
Chapter 3. IndyMac failed and was taken over by FDIC. Chapter 5. Steve Mnuchin was a Goldman Sachs alumni and private equity guy (first stop ESL Investments, run by Eddie Lampert of K-Mart, Sears fame, striping away value before moving them into bankruptcy) ready to buy IndyMac. Chapter 5. JC Flowers ran a private equity specializing in buying troubled financial firms and flipping them. "Flowers didn't hide the fact that his business model was predicated on profiting off pain" (p. 51). He acquired Ameriquest (as part of a consortium to avoid being subject to regulation), a mortgage company specializing in subprime loans, including buyers with no documentation and bad credit; also forged documents and added hidden rates and fees. FDIC subsidies made it impossible to lose money. FDIC plans were to stop lending, then add a loan modification program: "waterfall approach," starting with lowering interest rate, then extending number of years, then move principal payments to end of loan term.
Chapter 6. Chapter 7. Mnuchin (with little money invested) made a sweetheart deal to acquire IndyMac (included Flowers, John Paulson, Michael Dell and George Soros). Renamed it OneWest; while claiming to focus on restructuring, the incentive structure from FDIC actually encouraged foreclosures (FDIC paying most of the costs), which they did--using "robosigning" foreclosure documents (which was illegal). FDIC claimed the Mnuchin group was the only bidder and these terms needed to close the deal. Kamala Harris was California attorney general, but refused to sue OneWest, despite recommendations from her staff. Mnuchin bought more troubled banks. Wilbur Ross was the lead investor in the acquisition of BankUnited (Ross had acquired Trump Taj Mahal Casino in the 1990's). Ross usually bought a bankrupt company's debt (at least one-third, like coal, steel and textile companies), then bring it out of bankruptcy and becoming the biggest stockholder, then flip it (after raiding pension funds). BankUnited Strategy: put in the least amount of money to get the biggest government subsidy (similar for Mnuchin).
Chapter 8 "COLFIN AI-CA5 LLC." Who owned the companies that bought the foreclosed homes? Dummy companies using LLCs, making it next to impossible to trace actual owners. "It's a lot easier to hide your money in real estate than a bank account" (p. 106-7). Bank Security Act of 1970 was an anti-laundering law (Treasury got the information but it was protected after that). Michael Cohen worked for Trump, Sean Hannity and eight others. Hannity owned shell companies beginning with SPMK (28 of them with 870 properties). The LLC started in 1977 in Wyoming to help small businesses, then adopted by all states but requiring almost no information on the owners. Chapter 9. COLFIN stands for Colony Financial, owned by Thomas Barrack, with 30,000 homes under 300+ LLCs by 2016 (also owning bad debts of failed banks and bad mortgages in Germany). Barrack actually beat Trump on New Work properties including the Plaza Hotel (Trump lost the properties when the property market collapsed). Barrack was a "contrarian investor" and ran the first vulture fund for S&L debt in 1990 (Colony Capital). Some 747 S&Ls failed. The Resolution Trust Corporation (RTC) bundled the bad loans and foreclosed real estate and sold in bulk at massive discounts; Barrack bought $1.1 billion in assets for $510 million, then continued to add more (p. 126). He sold them off or repackaged them as mortgage-backed securities.
Chapter 10. Barrack bought the failing Miramax (with Qatari money), of Weinstein infamy, then bailed out Trump and Jared Kushner. "By November 2010, four million Americans had lost their homes to foreclosure" (p. 131). Offshore investments were uncovered by the Paradise Papers which included 120 politicians including Queen Elizabeth, plus Trump and Ross (Ross had an interest in Putin's son-in-law's shipping company). Barrack money circulated between US funds in Delaware to Cayman Island subs (tax exempt) then hither and yon. Money laundering was part of the picture--where did Barrack get his money? Sumitomo Bank of Japan was a prominent lender, as was Korea Exchange Bank, Qatar and others.
Chapter 11 starts with vulture companies, more than a dozen buying foreclosures. Private equity giant Blackstone was the largest (a leveraged buyout firm). Blackstone was started by Pete Peterson and Stephen Schwarzman in the mid-1980's, successful because of Peterson's connections. Chapter 12. Reverse mortgages really started with Reagan's 1987 Home Equity Conversion Mortgage Act. Unintended consequences were the creation of an industry that lobbied for increasingly loose regulations; the result was predatory practices. OneWest and Financial Freedom under Mnuchin broke even those loose rules systematically. Student loan firms were bilking those borrowers in similar ways (they're related because of lawsuits).
Chapter 14. Race relations and redlining. Redlining legally started with the New Deal's HOLC, which used colors from green to red to identify quality of neighborhoods. Red--the worst--were minority communities identified as "too hazardous for lending; plus "negro encroachment." FHA (1934) would only lend to white home buyers in white neighborhoods. Blanks and Hispanics have a long history of getting mortgages on worse terms based on race rather then credit worthiness, also known as "junk loans." Predatory lending practices increased over time, especially in the 21st century. Because of the predatory lending, e.g., subprime, minority foreclosures were higher than for white neighborhoods. [A case can be made that, thanks to capitalism, racial discrimination was less because the predatory lenders were equally willing to bilk white homeowners.]
Chapter 15. OneWest financed fracking in various locations and for-profit Corinthian College that went bankrupt under government fraud charges. The bank also made investment in Hollywood, giving Mnuchin his name on various films. Ocwen Financial bought OneWest bad debts, then paid $2 billion to Consumer Financial Protection Bureau for "systematic misconduct at every stage of the mortgage servicing process" (p. 211). John Thain became CEO of CIT after it was bailed out by the Feds, then went bankrupt anyway, losing the government $2.3 billion. With debt off the books after bankruptcy, CIT did okay financially. Mnuchin wanted to sell OneWest to CIT. Chapter 16. Community organizers fought against the abuse of the bad banks and got agreements with several to mend their wicked ways. OneWest and CIT were not interested in dealing with the organizers and rejected their proposals out of hand. Despite heart-wrenching hearings (including Sandy Jolley), Mnuchin and Thain got everything they wanted (that is, no constraints on their abuses) and the merger approved. Later, CIT discovered bad accounting at OneWest and missing $230 million [due diligence apparently was lacking]. Mnuchin's ill-gotten gains made him a multi-billionaire, then he served as campaign finance chair for Trump's presidential run.
Chapter 17. Thain created a new mortgage-backed security (MBS) for Blackstone based on rental homes ($479 million bundle of debt for 3,207 homes), announced at the Waldorf, which Blackstone owned [what could possibly go wrong?]. JP Morgan bought the MBS, sliced them into five tranches, getting a AAA rating on the top trance and A for the next two. More followed. No one involved in ownership of the houses had an interest in maintaining the houses (houses were valued based on broker's price opinions or BPOs). [The 2008 crisis involved both securitized debt and other derivatives plus special purpose entities, both alive and well. Usually, new crashes are based on different circumstances, but the next one could be just a replay of 2008. The banks don't have any obvious incentives to be more conservative. Why wouldn't they be bailed out again?]
Chapter 18. The chapter started with the Wilson administration and Louis Brandeis helping craft the Federal Reserve and the Federal Trade Commission; then the New Deal legislation. Most of the chapter covered Jaime Dimon of JP Morgan, which focused on rich folk and cutting loans to home lending. JP Morgan did buy a $1.1 billion MBS from Colony's Barrack. Barrack helped fund Trump's campaign to the tune of $130 million, then Trump's inauguration committee, another $100 million effort. Chapter 19. This chapter is about the Trump family starting with his economic advisory team, made up mainly of hedge fund and private equity robber barons, while calling "Crooked Hillary a tool of Wall Street," then "lock her up" and "drain the swamp." Then the focus shifted to his father, Fred, who specialized in shady deals beginning at least by the Great Depression. Time after time he effectively fleeced the government programs on building and renting subsidized housing. Redlining was part of the system, even after it was outlawed and government agencies including the FBI and Justice Department sued him, usually settling for miniscule fines and signing consent decrees promises to reform (which often didn't happen). Woody Guthrie rented an apartment from Trump and actually wrote a less-than-flattering song about "Old Man Trump." In summary: "Fred Trump had ripped off the federal government and grown his business through deception and prejudice" (p. 290).
Chapter 20 is on Trump University. Trump sold a three-day course for $1,495 and a gold elite course for $34,995. TU faced its first class action lawsuits in 2010, settling the claims for $25 million just after defeating Clinton and paid up just before his inauguration. Part VII is on President Trump and Chapter 21 "Triumph of the Homewreckers." Trump's victory was described as "harnessing the public rage and envy at having been left behind in the economic recovery. ... The forgotten men and women or our country will be forgotten no longer" (p. 299), but much of the harm was perpetrated by him and his colleagues. Many of these colleagues joined his administration, with Mnuchin ("The Foreclosure King") at Treasury and Wilbur Ross at Commerce at the forefront. Blackstone's Schwarzman chaired the White House Strategic and Policy Forum, vice chaired by Jaime Dimon. Tom Barrack did not take a position (he was offered several), but his deputy was Rick Gates. Gates became a campaign operative who later pled guilty to conspiracy against the US related to Russian interference. Favorable tax bills and deregulation followed, favoring this group. The major tax bill lowered corporate rates from 35% to 21% and lowered marginal rates especially favorable to the rich. Specific deductions went to real estate, allowing additional deductions and the ability to pass income through shell companies. Jared Kushner's family, it was disclosed, also participated in apartment units in the mid-west through shell companies. Legislation and executive actions defanged much of the Dodd-Frank Act and other banking legislation. The "commodificaton of housing" was mentioned, comparing commodities to utilities--not good news for home owners or renters [a topic worthy of a separate blog].
Epilogue. Glantz points out that the book (and his related projects) have garnered a lot of attention which led to investigations by various governmental bodies at the local, state and federal level. [If history is a guide, relatively limited action will happen until the next scandal and financial collapse, like the New Deal. Corruption seems to go in cycles, peaking when the economy is booming, then the corruption is discovered and outrage causes action.]