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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
could double or even triple, leaving borrowers with few alternatives: if they had es-
tablished their creditworthiness, they could refinance into a similar mortgage or one
with a better interest rate, often with the same lender; if unable to refinance, the
borrower was unlikely to be able to afford the new higher payments and would have
to sell the home and repay the mortgage. If they could not sell or make the higher
payments, they would have to default.
But as house prices rose after , the /s and /s acquired a new role: help-
ing to get people into homes or to move up to bigger homes. “As homes got less and
less affordable, you would adjust for the affordability in the mortgage because you
couldn’t really adjust people’s income,” Andrew Davidson, the president of Andrew
Davidson & Co. and a veteran of the mortgage markets, told the FCIC. Lenders
qualified borrowers at low teaser rates, with little thought to what might happen
when rates reset. Hybrid ARMs became the workhorses of the subprime securitiza-
tion market.
Consumer protection groups such as the Leadership Conference on Civil Rights
railed against /s and /s, which, they said, neither rehabilitated credit nor
turned renters into owners. David Berenbaum from the National Community Rein-
vestment Coalition testified to Congress in the summer of : “The industry has
flooded the market with exotic mortgage lending such as / and / ARMs. These
exotic subprime mortgages overwhelm borrowers when interest rates shoot up after
an introductory time period.” To their critics, they were simply a way for lenders to
strip equity from low-income borrowers. The loans came with big fees that got rolled
into the mortgage, increasing the chances that the mortgage could be larger than the
home’s value at the reset date. If the borrower could not refinance, the lender would
foreclose—and then own the home in a rising real estate market.
Option ARMs: “Our most profitable mortgage loan”
When they were originally introduced in the s, option ARMs were niche prod-
ucts, too, but by they too became loans of choice because their payments were
lower than more traditional mortgages. During the housing boom, many borrowers
repeatedly made only the minimum payments required, adding to the principal bal-
ance of their loan every month.
An early seller of option ARMs was Golden West Savings, an Oakland, Califor-
nia–based thrift founded in and acquired in by Marion and Herbert San-
dler. In , the Sandlers merged Golden West with World Savings; Golden West
Financial Corp., the parent company, operated branches under the name World Sav-
ings Bank. The thrift issued about billion in option ARMs between and
. Unlike other mortgage companies, Golden West held onto them.
Sandler told the FCIC that Golden West’s option ARMs—marketed as “Pick-a-
Pay” loans—had the lowest losses in the industry for that product. Even in —the
last year prior to its acquisition by Wachovia—when its portfolio was almost entirely
in option ARMs, Golden West’s losses were low by industry standards. Sandler attrib-
uted Golden West’s performance to its diligence in running simulations about what
