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  She talked to a Chase Home Finance representative. “I have nine months to work something out,” she said. “We have plenty of time, I have a perfect credit score, and I’ve never paid anything late. What can we do?” The representative told her to fax in financial documents and they would get back to her. Lisa did what she was told but never heard anything. She called back the next week. And the next week. And the next.

  Lisa never talked to the same person and would constantly have to explain her story from scratch. They always requested new copies of the documents, claiming to have lost the previous ones. Lisa spent a fortune in copy and fax charges; it was as though the documents she sent drifted into a black hole. And there didn’t seem to be any consistency from one Chase representative to the next. Someone would tell Lisa she was days away from approval, and the next employee would have no record of her application, forcing her to start over. The ordeal took enough time and effort to become a second job.

  At the cancer center, Lisa increasingly found herself enmeshed in her patients’ financial crises, just as she struggled to deal with her own. It was customary for patients to ask for a doctor’s signature confirming their diagnosis so they could present it to creditors and secure financial relief. But patients would come back multiple times to Lisa, asking for another doctor’s note, and then another. The mortgage companies were obviously losing the notes. Lisa understood what was happening but never revealed her own secret of financial suffering. Patients would even ask Lisa to call their mortgage company to confirm their medical condition. But that only brought her face-to-face with the same crushing bureaucracy she personally encountered. Lisa’s frustration compounded as she haggled with other people’s mortgage companies by day and her own at night.

  At one point a Chase representative told Lisa, “Well, you’re calling us, but on loans like this we answer to Wells Fargo, and they’re blocking all modifications.” Lisa had never walked into a Wells Fargo bank or had any dealings with them at all. What interest did they have in her mortgage? She called Wells Fargo and asked why it was blocking her modification, but nobody there had any record of a Lisa Epstein. Since Chase representatives gave her different information every day, she figured Wells Fargo agents might as well. She added them to her roster of weekly calls. But nobody at Wells ever recognized her as a customer.

  The runaround used up Lisa’s entire buffer of savings. Instead of being able to act prudently in January, she was now desperate in September, after wasting months calling, faxing, pleading, and begging. Finally someone at Chase offered advice. The bank had enough problems assisting borrowers who had already defaulted; it would never go out of its way for someone current on her loan. And while no agent ever said explicitly, You must skip a few payments to earn our attention, the implication was clear: Lisa should stop paying her mortgage for ninety days, trigger a formal default, and then call back. Only then would Chase offer help.

  Lisa had never missed a payment on anything in her life—not her mortgage, not her car loan, not her utility bills, nothing. Something inside her associated delinquency with shame, with inadequacy, with a betrayal of her most cherished obligations. “I’m a good person because I have a good credit score,” she would tell herself. But like millions of Americans on the wrong side of the housing collapse, she was desperate. Her marriage was breaking apart, her daughter required medical attention, and her savings were nearly depleted. If not paying the mortgage could lead her out of this mess, though it went against every impulse in her body, she would do it.

  At the end of October 2008, the same month banks like Chase received hundreds of billions of dollars in a government bailout, Lisa Epstein didn’t turn in her monthly mortgage payment. The day she became a delinquent homeowner, she vomited. And she did the same thing almost every day for three months. Lisa checked each day off on a wall-mounted calendar, and by the end she must have lost twenty pounds. It wasn’t about losing the house: after all, she considered it a monstrosity. It was more about losing her self-worth, her mark of accomplishment, those numbers on a page that size you up as a net contributor to society or a burden.

  Around this time Lisa had a dream. It was nighttime in the big house, amid a deluge of rain that was pouring down the windows in sheets. Lisa held her daughter to comfort her during the clatter. The walls filled up with water, giant pulsing bulges swelling against the furniture, expanding and expanding. Finally the walls popped and water burst through, flooding the home. Lisa grabbed her child and ran out into the street, away from this underwater home that threatened to submerge her and her family. She didn’t need to consult a psychiatrist to interpret the dream’s meaning.

  The ninety days were up, and Lisa called Chase again. “Okay, it’s been three months,” Lisa said. The rep said Chase would send something right out to her, just hang on, not to worry.

  A couple weeks later, she got the knock at the door. And she just knew.

  “They’re from the bank and it’s not good news!”

  Alan trudged to the bathroom with the bundle of documents and put it in Lisa’s hands. She steadied herself and tore open the envelope.

  In Florida, when lenders wanted to foreclose on a delinquent borrower, they had to file a lawsuit. So this was a copy of a complaint from Florida Default Law Group, a leading foreclosure mill, holding Lisa liable for violating the terms of her mortgage, accompanied by a court summons and a bevy of legal notices. She had twenty days to file a written response.

  Lisa found a surprise atop the summons. The name Chase Home Finance didn’t appear. Neither did Wells Fargo. Lisa ran her finger along the section that named the plaintiff: “U.S. Bank NA as trustee for JPMorgan Mortgage Trust 2007-S2.”

  Lisa already had no idea how Wells Fargo fit into her mortgage. Now here was U.S. Bank—which to her sounded fictional, like the name of a bank in a movie—listed as the lead plaintiff in the foreclosure. And what was a trustee? Or a trust?

  What did any of this mean?

  2

  THE DARK SIDE OF THE AMERICAN DREAM

  Lisa Epstein drove down Highway A1A, along the Intracoastal Waterway, back to her old apartment in Palm Beach. At her side was Jenna, in a car seat; atop the dashboard was an envelope containing the monthly payment on the unsold co-op. Though her house was in foreclosure, Lisa always paid the mortgage on the apartment, her fallback in case of eviction.

  Lisa gazed at the water out the window. She never wanted to miss mortgage payments; Chase told her to do it and promised assistance afterward, but then put her into foreclosure. The delinquency triggered late fees, penalties, and notifications to national credit bureaus. A damaged credit score affected a mortgage company’s decision to grant loan relief, which hinged on the ability to pay. Even if Lisa managed to finally sell the apartment, even if she could satisfy the debt on the house, the injury from this “advice” would stick with her for years. Chase Home Finance never mentioned the additional consequences, emphasizing only the possibility of aid. The advice was at best faulty, at worst a deliberate effort to seize the home. Lisa spent a lifetime living within her means, guarding against financial catastrophe. Now Chase Home Finance obliterated this carefully constructed reputation. She felt tricked.

  America has a name for people who miss their mortgage payments: deadbeats. Responsible taxpayers who repay their debts shouldn’t have to “subsidize the losers’ mortgages,” CNBC host Rick Santelli shouted from the floor of the Chicago Board of Trade on February 19, 2009, two days after Lisa got her foreclosure papers. “This is America! How many of you people want to pay for your neighbor’s mortgage, that has an extra bathroom and can’t pay their bills, raise your hand!” The floor traders in Chicago, between buying and selling commodity futures, hooted. This rant would later be credited as the founding moment of the Tea Party. And it signified a certain posture toward delinquent homeowners, a cultural bias that equated missing the mortgage payment with failing the duties of citizenship. The indignation didn’t account for mortgage companies driving
customers into default. However, lenders welcomed anything that humiliated deadbeats into blaming themselves. In most cases it worked: in the twenty-three states that required judicial sign-off for foreclosures, around 95 percent of the cases went uncontested.

  But Lisa had an inquisitive mind. Before she would acquiesce, she wanted to understand the circumstances that led to this lawsuit from U.S. Bank, an entity she had never encountered before seeing it listed as the plaintiff. She had three questions: who was this bank, why did it have a relationship with her, and why was it trying to take her house?

  As it happens, U.S. Bank is real. It’s the fifth-largest bank in the country, with more than three thousand branches, mainly in the Midwest and the Pacific Coast, not in Florida. Lisa learned all this through a cursory Google search. U.S. Bank also had a toll-free customer service number. But just like Wells Fargo, U.S. Bank’s reps had no record of a Lisa Epstein. “Look, you’re suing me. How could you not know who I am if you’re suing me?” Lisa implored. She gave U.S. Bank her Social Security number, her address, all her mortgage information. Nothing turned up.

  Lisa kept every document from the closing in an old canvas bag from a nursing conference. She read the mortgage documents line by line, the way she had while eight months pregnant and sitting in the offices of DHI Mortgage. There was no mention of U.S. Bank, Wells Fargo, or even Chase, where she sent mortgage payments for a couple of years. Lisa made the deal with DHI Mortgage. How did these other banks get into the picture?

  Lisa had a bit more luck when she Googled “U.S. Bank NA as trustee for JPMorgan Mortgage Trust 2007-S2,” the name of the plaintiff on her foreclosure documents. This sent her to the website of the Securities and Exchange Commission, specifically an investor report (known as an 8-K form) for the JPMorgan Mortgage Trust. One paragraph included every party she had become familiar with over the past several months:

  J. P. Morgan Acceptance Corporation I (the “Company”) entered into a Pooling and Servicing Agreement dated as of May 1, 2007 (the “Pooling and Servicing Agreement”), by and among the Company, as depositor, Wells Fargo Bank, N.A., as master servicer (in such capacity, the “Master Servicer”) and securities administrator (in such capacity, the “Securities Administrator”) and U.S. Bank National Association, as trustee (the “Trustee”), providing for the issuance of J. P. Morgan Mortgage Trust 2007-S2 Mortgage Pass-Through Certificates.

  Most homeowners had as much chance of decoding this as they did of learning Mandarin Chinese. Lisa had no background in real estate, economics, or high finance. The only time she dealt with anything Wall Street–related was when she chose funds for her 401(k) upon starting a new job. It took years of study to master nursing; nobody offered her a class in pooling and servicing agreements, or mortgage pass-through certificates. However, everything that transformed the mortgage market, everything that layered risk and drove the housing bubble, everything that made buying a home in 2007 infinitely more dangerous than it should ever be, was contained in that innocuous-sounding paragraph.

  One thousand families. That’s how many Americans lost their homes each day at the height of the Great Depression. Franklin Roosevelt’s response to this relentless destruction created the most successful housing finance system in the world, a key to America’s political stability and emergence as an economic powerhouse.

  To stop foreclosures, the Home Owner’s Loan Corporation (HOLC) bought defaulted mortgages from financial institutions at a discount and sold them back to homeowners. Beginning in 1933, HOLC acquired one million mortgages—one out of five in the country at that time. Eighty percent of HOLC clients saved their homes when they otherwise might have lost them. And once every mortgage was paid off and the program closed, HOLC even turned a small profit.

  HOLC gave borrowers a twenty-year mortgage with a fixed interest rate, allowing them to gradually pay off the principal over the life of the loan, a process known as amortization. At the time very few Americans had long-term mortgages. The most common product lasted two to five years; borrowers would pay interest each month and then either make a “bullet” payment of principal at the end or roll over into a new loan. When bullet payments came due during the Depression, there was no way for out-of-work homeowners to find the cash. And mortgage holders, saddled with their own funding problems, refused to renegotiate contracts and seized the homes. This only accelerated the housing collapse, putting more homes on the market when nobody could afford to buy. The HOLC solution was intended to attenuate this downward cycle. But it also eliminated the volatility of the bullet payment, which magnified periods of economic hardship. HOLC generated confidence in the long-term, fully amortized mortgage, which previously was seen as a scam unscrupulous door-to-door salesmen used to rob lower-class laborers of down payments.

  The government did not want to hold HOLC mortgages, and investors feared buying them, since the families making payments had previously defaulted. So in 1934 Roosevelt established the Federal Housing Administration to provide mortgage insurance on HOLC loans. Borrowers paid a small FHA premium, and investors would be guaranteed their share of principal and interest payments. The FHA would eventually offer protection to loans made by private lenders as long as they issued mortgages with a 20 percent down payment and terms of at least twenty years. In 1938 the Federal National Mortgage Administration, commonly known as Fannie Mae, enabled this by purchasing government-insured mortgages, injecting additional capital into the lending industry.

  More than anything, the system delivered security. Families could make one affordable monthly payment for two or three decades, and glory in the dignity of homeownership. Builders supported the desire by constructing developments of detached single-family homes outside of metropolitan centers. The interstate highway system connected suburbs to the cities. Subdivisions sprang up everywhere, and millions of Americans sought long-term fixed-rate loans to secure their spot in them. The FHA loosened standards and granted insurance on thirty-year loans with as little as 5 percent down for new construction. The GI Bill for returning World War II servicemembers further guaranteed low-rate loans through the Veterans Administration. In 1940, 15 million families owned their own homes; by 1960 that number jumped to 33 million. Buying a place in the suburbs became part of growing up, like college graduation or a wedding, the epitome of the promise of the middle class from the country that claimed to have invented it. It was a utopia of white picket fences, modern kitchens, and freshly cut grass.

  Private lenders filled the demand for these loans, particularly the savings and loan industry, which had been around since the 1830s (known back then as the building and loan). The biggest problem for companies lending long is the funding: there’s money to be made, but lenders need large amounts of cheap up-front capital. Savings and loans found the formula by funding home mortgages with customer deposits. Government-supplied deposit insurance made ordinary Americans confident that they could put money into a bank and have it protected. The S&Ls benefited further when Congress granted them an interest rate advantage over commercial banks. This nudged depositors into S&Ls, increasing the funding available for mortgage finance.

  S&Ls typically paid a healthy 3 to 4 percent rate of interest on accounts and charged between 5 and 6 percent on mortgages. That small float on hundreds of billions of dollars in loans added up. The system was mutually beneficial, and everyone had a stake in a successful outcome. State laws initially restricted savings and loans to issuing residential mortgages within fifty to a hundred miles of their headquarters. So the S&Ls needed communities to prosper to increase deposits and subsequently increase loans. S&L presidents became local leaders, sponsoring local golf tournaments or Little League baseball teams.

  When families encountered trouble—unemployment, medical bills, untimely death—and could no longer pay the mortgage, lenders worked with them to prevent foreclosure, because it was in their financial interest. They made more money keeping the borrower in the home, even with a reduced payment, than having to sell at a dis
count in foreclosure. This incentive maintained stability and kept home values rising. The annual foreclosure rate from 1950 to 1997 never rose above 1 percent of all loans and was often far lower.

  By 1980 there was more money sloshing around the mortgage market—about $1.5 trillion—than in the stock market. And Wall Street investment banks looked at all that cash the way Wile E. Coyote looked at the Road Runner. They wanted a piece of the action.

  Lew Ranieri took over the mortgage trading desk for Salomon Brothers in 1978. He was fat, unkempt, and owned four suits, all of them polyester. In the Wall Street memoir Liar’s Poker, Michael Lewis describes Ranieri as “the wild and woolly genius, the Salomon legend who began in the mailroom, worked his way onto the trading floor, and created a market in America for mortgage bonds.” But he didn’t issue the first mortgage-backed securities; the federal government did.

  Faced with a budget deficit during the Vietnam War, in 1968 Lyndon Johnson split up Fannie Mae to push its liabilities off the books. A redesigned Government National Mortgage Company (Ginnie Mae) continued to buy government-insured mortgages. But the new Fannie Mae and its counterpart, the Federal Home Loan Mortgage Corporation (Freddie Mac), became quasi-private, quasi-public companies (officially government-sponsored entities, or GSEs), which could purchase conventional mortgages not insured by the government, provided they met certain guidelines—usually thirty-year fixed-rate mortgages carefully underwritten to ensure that the borrower would pay them back. The GSEs would pool hundreds of these loans together and create bonds; they called it securitization. Revenue streams were created from the monthly mortgage payments, with each investor entitled to a proportional piece. For a small fee, GSEs guaranteed payments to investors, and because investors believed the government would never let the GSEs default, they happily bought the bonds. Investor cash built additional capital for mortgage financing, allowing more people to purchase a home.