Free All The Devils Are Here: Unmasking the Men Who Bankrupted the World by Joe Nocera, Bethany McLean

were plenty of others: First Alliance, Cityscape, Aames, and more. Steve Holder, who had been an executive at Long Beach, co-founded a company called New Century. Robert Dubrish, another Long Beach alum, founded Option One, which was bought by H&R Block in 1997. (Both Option One and New Century had former Guardian executives in key positions.) They were freewheeling entrepreneurs, grabbing for the brass ring; they didn’t spend a lot of time worrying about crossing every
t
and dotting every
i
. As Paul Mondor, the director of regulatory compliance for the Mortgage Bankers Association, told the
American Banker
in 1997, “It’s a high-risk, high-return market … it stands to reason you’ll have flashier types who worry less about bending the rules.”
    From 1994 to 1999, the number of loans made by companies that identified themselves as subprime lenders increased roughly six times, from about138,000 to roughly 856,000, according to the Federal Reserve. Over the same period, the dollar volume of subprime mortgage originations increased by a factor of nearly five, from $35 billion to $160 billion, or almost 13 percent of all mortgage originations, according to a joint study by HUD and the Treasury. Economists, including those at the Federal Reserve, credited subprime lending with the increased rate of homeownership, which by 1999 hit a record 66.8 percent. What tended to be forgotten, though, was that most subprime mortgages did not go toward the purchase of a new house, but rather were refinancings by existing homeowners. (According to a joint HUD–Treasury report, a staggering 82 percent of subprime mortgages were refinancings, and in nearly 60 percent of those cases the borrower pulled out cash, adding to his debt burden.)
    It wasn’t just the Democratic administration that saw a reason to applaud the rise of subprime lending, either. Conservatives were applauding, too. For instance, in that same 1999 American Enterprise Institute paper, the authors touted the virtues of something called high loan-to-value lending, or HLTV. That was industry jargon for loans with low or no down payments. (A loan with a 100 percent loan-to-value ratio has no down payment; a 90 percent LTV ratio has a 10 percent down payment; and so on.) “Consumer debt collateralized by the borrower’s home is effectively a senior claim on his income, backed by an asset that would otherwise be protected from seizure by creditors if he were to file for bankruptcy,” wrote the authors, Charles Calomiris and Joseph Mason. “Because HLTV lending can rely on securitization for the bulk of its financing, it provides a more diversified, and thus a more stable, source of consumer credit.” They concluded, “HLTV lending is good for the American consumer and for the U.S. economy.”

     
    And all the while, Angelo Mozilo watched with amazement as subprime lending took off. It’s not that he didn’t believe in the virtue of increased homeownership. He did, passionately. The government’s desire to get more people into their own homes aligned not just with Mozilo’s business model but with his psyche. When he started in the business, after all, redlining—the practice of not making loans in poor neighborhoods—was standard practice in the banking industry. People with minority or immigrant background, like himself, had a harder time buying new homes than middle-class WASPs. Women had a harder time getting loans than men.
    Mozilo felt that he and Countrywide were helping to democratize the housing market. “He always felt like he was compelled to help people get into homes,” says Howard Levine. Once, during the administration of the first George Bush, Jack Kemp, Bush’s HUD secretary, tried to scale back some government assistance for the mortgage market. Mozilo publicly denounced him as “the worst person who could possibly have been put in that position.” It was a very impolitic thing to say, but Mozilo couldn’t help himself.
    When Clinton