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BEFORE OUR VERY EYES
conscientious borrowers who tried to puzzle out their implications, and opening the
door for those who wanted in on the action.
Many people chose poorly. Some people wanted to live beyond their means, and by
mid-, nearly one-quarter of all borrowers nationwide were taking out interest-
only loans that allowed them to defer the payment of principal. Some borrowers
opted for nontraditional mortgages because that was the only way they could get a
foothold in areas such as the sky-high California housing market. Some speculators
saw the chance to snatch up investment properties and flip them for profit—and
Florida and Georgia became a particular target for investors who used these loans to
acquire real estate. Some were misled by salespeople who came to their homes and
persuaded them to sign loan documents on their kitchen tables. Some borrowers
naively trusted mortgage brokers who earned more money placing them in risky
loans than in safe ones. With these loans, buyers were able to bid up the prices of
houses even if they didn’t have enough income to qualify for traditional loans.
Some of these exotic loans had existed in the past, used by high-income, finan-
cially secure people as a cash-management tool. Some had been targeted to borrow-
ers with impaired credit, offering them the opportunity to build a stronger payment
history before they refinanced. But the instruments began to deluge the larger market
in and . The changed occurred “almost overnight,” Faith Schwartz, then an
executive at the subprime lender Option One and later the executive director of Hope
Now, a lending-industry foreclosure relief group, told the Federal Reserve’s Con-
sumer Advisory Council. “I would suggest most every lender in the country is in it,
one way or another.”
At first not a lot of people really understood the potential hazards of these new
loans. They were new, they were different, and the consequences were uncertain. But
it soon became apparent that what had looked like newfound wealth was a mirage
based on borrowed money. Overall mortgage indebtedness in the United States
climbed from . trillion in to . trillion in . The mortgage debt of
American households rose almost as much in the six years from to as it
had over the course of the country’s more than -year history. The amount of
mortgage debt per household rose from , in to , in . With
a simple flourish of a pen on paper, millions of Americans traded away decades of eq-
uity tucked away in their homes.
Under the radar, the lending and the financial services industry had mutated. In
the past, lenders had avoided making unsound loans because they would be stuck
with them in their loan portfolios. But because of the growth of securitization, it
wasn’t even clear anymore who the lender was. The mortgages would be packaged,
sliced, repackaged, insured, and sold as incomprehensibly complicated debt securities
to an assortment of hungry investors. Now even the worst loans could find a buyer.
More loan sales meant higher profits for everyone in the chain. Business boomed
for Christopher Cruise, a Maryland-based corporate educator who trained loan offi-
cers for companies that were expanding mortgage originations. He crisscrossed the
nation, coaching about , loan originators a year in auditoriums and classrooms.
