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The Poison of Toxic Mortgages

Here is a Q&A with author Edmund L. Andrews.

Edmund Andrews is like millions of other Americans who are in deep financial trouble. In 2004, he bought a house he couldn’t afford with one of the many subprime loans that flooded the market during the housing boom of 2002 to 2007. He was already in financial straits thanks to a divorce; half of his take-home pay was going to child support and alimony. But a new marriage meant a fresh start, so without providing any income information, Andrews got a mortgage for half a million dollars.

Sound familiar? It should because it’s one of many sob stories that help explain the downfall of the U.S. housing market.

But there’s one big difference between Edmund Andrews and other homeowners who are in danger of defaulting on their mortgage. He is a 16-year veteran economics reporter for the New York Times whose job it is to report on U.S. financial policy and mind the Federal Reserve. He’d written early-warning stories about the easy availability of reckless mortgages when money was flowing into the United States from overseas. At that time, Wall Street was buying bundled subprime mortgages that promised high yields with little risk as long as the housing market kept rising. As a result, lenders were giving loans to people who could not afford them.

Andrews knew this. He knew enough, arguably, to be suspect of the many players in the housing financial system—investment bankers, rating agencies, lenders, mortgage brokers—who would heavily contribute to the collapse of the U.S. economy. If anyone should have been wary of a too-good-to-be-true mortgage, it was Andrews.

In his new book, Busted: Life Inside the Great Mortgage Meltdown, Andrews chronicles how he was seduced into taking out a mortgage he couldn’t afford and investigates all the parties who played a part in offering loans to millions who aren’t at all sure they will ever pay them back. [Read an excerpt from the book.] When Andrews spoke with AARP Bulletin Today about his book, he and his new wife were eight months behind on their mortgage, awash in credit card debt and struggling with how to handle their self-inflicted financial mess.

Q. A lender gave you money even when you disclosed your financial situation?

A. Yes, in 2004, I had fallen in love with Patty, we were looking around for a place to live and we both needed some space because we both had kids. I had mortgage lenders falling over themselves to lend money to me because I had a pretty good credit rating. They didn’t care about any of the details of my finances. So after looking around at rental apartments and houses, I found it was almost cheaper and easier to buy a house for half a million dollars despite my circumstances.

Q. But you knew better. You wrote warning stories about these subprime mortgages. Why didn’t you resist?

A. Our theory was Patty would be able to earn enough to make up the difference. All my paycheck would go to mortgage. We were overly optimistic over how much Patty could earn because she’d been a stay-at-home mom for the past 20 years and was moving from Los Angeles to Washington, D.C. It was magical thinking.

Q. Are borrowers like you responsible for the downfall of the housing market?

A. Well, if you’re asking should the borrower take responsibility for bad judgment or even just pure folly, yes, the blame lies with the borrower. Unless you were truly manipulated or defrauded, which was the case with some people, you have to take responsibility for your own decisions. I do. I’m not blaming the banks for this.

Q. True, but folks now in trouble—there are some 4 million to 5 million Americans going into foreclosure—had some help getting there.

A. Yes, on a broader level, I absolutely put primary blame on the financial system, particularly on the Wall Street investment banks, which absolutely knew housing prices had gotten to bubble-like levels even as early as 2004. They knew the models for calculating the risk of these new mortgages were absurd. The ratings agencies were manipulated. If you look at how they justified the AAA ratings for mortgage-backed securities that they did, you can see it was insane. This is not rocket science. This was fundamentally corrupted rationalization on the part of a whole series of major institutions.

Q. Who should have shouted mea culpa?

A. I sure wish I would see some major Wall Street guys, or even the ratings agencies, say that. I’ve gotten an enormous amount of criticism for this book for being reckless.

Q. Personally?

A. Yes, I’ve come under enormous attack for being reckless and not showing remorse for the decisions I’ve made. I have laid out in brutal detail my mistakes. I’ve never interviewed, even heard of a finance executive, a Wall Street exec, a banker, a mortgage lender, anyone from a ratings agency admitting to making huge, unconscionable mistakes.

Q. Considering your emotional and personal involvement in the mortgage crisis, do you think it tainted your reporting?

A. No, I really don’t. The articles I wrote about higher-risk lending were all pointed in the direction of “this is dangerous stuff.” There was no kind of backhanded rationalization of my own decisions. In fact, I wrote other articles about the Fed and Alan Greenspan and his peculiar affection for rising consumer debt; how he was ready to rationalize the ever increasing percentages of household debt that families are taking on.

Q. Speaking of the then-chairman of the Federal Reserve, you told him your personal situation during one of your interviews.

A. I was interviewing Greenspan about whether he, or the Fed, should take some blame for failing to rein in subprime mortgages. I felt the urge to tell him about my situation.

Q. And how did he react?

A. He was absolutely shocked. We never got into very personal discussions, so he blanched. “Why did you do that?” he asked. His voice was sharp. I felt I was being chastised, like I was talking to my own father and had to explain a bad decision I had made.

He said he thought my lenders were rational because they knew I was the kind of guy who would do anything I could to keep the mortgage and I had gone for three years without defaulting, so they have probably already made money on me.

Q. But you’re behind on your mortgage now.

A. Yes, very behind. Several months.

Q. So you’re not paying your lenders. It seems that Greenspan was wrong.

A. Right. No question about it.

Q. When someone forecloses on a home, how does that affect the market?

A. Foreclosure is bad for everyone. The lender loses more money than they would if they had modified the loan, the borrower loses their home and the value of neighborhood homes goes down. But there are also cases where bailing out a troubled borrower inadequately may just prolong the agony and cause bigger losses down the road. There’s also a huge moral hazard problem. If everybody thinks they can get a better deal by not paying their mortgage and pleading hardship, then you could have a massive loss to the financial system that is even bigger than what we’ve seen so far.

Q. How should you, and others in your situation, then, be helped—if at all?

A. I think the extent to which the government can step in to subsidize loan modifications can be justified because there really is this failure in the marketplace. This stems from how fragmented the ownership of these mortgages has become. There’s so many investors and people with different interests in any single mortgage, it becomes impossible to work out a proper loan modification.

My impression is that many troubled homeowners—and I’m one of them—do not view foreclosure as the worst thing in the world. They want the mess to be resolved. And if resolving means losing the house and going to a smaller house or apartment and putting the whole episode behind them, they would go for it.

Q. Do you want to get out of your house?

A. In the abstract, that would be my favorite thing. But we still have one daughter who is here, a dog and a school situation. So there are a lot of reasons why we would hesitate to move out of the house. But if it weren’t for those things, moving to a decent apartment would save us a ton of money and put this problem to an end. That would be liberating.

Q. How did writing this book affect your personal life?

A. I think it actually helped. Patty helped me think through some of the issues between us. We had fierce fights and arguments about how to approach money. We were in different worlds. We had to think through what we had done, why we’d been at an impasse. But it was agonizing to write about some of these things, which were deeply embarrassing.

Q. So why did you write the book? To pay the mortgage?

A. Obviously, I saw the possibility of making some money and helping our situation. But I didn’t really make any serious money and don’t think I’ll come close to bailing us out. I’m a journalist, a storyteller by profession, and it seemed to me I had a story that could unite a personal situation with a broader cultural and economic phenomenon. I also had an unusual perspective because I’d been covering economic policy and talking with a lot of the principals throughout this period. I could write a book that would shed light on the whole broad catastrophe and people would actually read it.

Q. Did this experience change your view of capitalism?

A. By instinct, I’ve always been a free-market economic conservative. I’ve been a deregulator kind of guy. I’m still a believer in capitalism and markets, but it’s been very sobering to really think about this and look at what these great and wise institutions were doing. It was horrible, it was criminal.

Carol Kaufmann is a contributing editor at the AARP Bulletin.