Houses of Cards

The Foreclosure of America: The Inside Story of the Rise and Fall of Countrywide Home Loans, the Mortgage Crisis, and the Default of the American Dream BY Adam Michaelson. Berkley Hardcover. Hardcover, 368 pages. $25.

The cover of The Foreclosure of America: The Inside Story of the Rise and Fall of Countrywide Home Loans, the Mortgage Crisis, and the Default of the American Dream

Since I’ve spent much of this decade inveighing against the debt-driven housing bubble in reports, columns, and other venues, I welcomed the chance to read The Foreclosure of America. As one of the first insider accounts of Countrywide Financial, the mortgage giant at the center of the mania, Adam Michaelson’s book gave me the illicit feeling that I had stormed enemy headquarters and found its battle plan. Not surprisingly, that plan was not terribly impressive.

Michaelson was in middle management at Countrywide through the peak years of the housing boom. He started in 2003 and was given his walking papers as the bubble began to burst in 2006. He was not a numbers guy, as he repeatedly tells us; he was a vice president in the marketing division. His job was to find effective ways to sell Countrywide loans to a credit-hungry nation.

Unlike many of his former colleagues—apparently including the numbers geeks—Michaelson does have some common sense. The centerpiece of his book is the account of a meeting of top Countrywide executives at company headquarters in Calabasas, California, in the summer of 2004. The meeting took place in a huge windowless conference room that supposedly doubled as a bomb shelter.

The executives had gathered to marvel at the latest innovation from Countrywide’s product-development team, the PayOption Adjustable Rate Mortgage. This mortgage allowed homeowners to hang on to their homes with minimal payments, which didn’t even need to cover interest costs. As a result, they could find themselves deeper in debt every month. This could go on for up to five years, when the loans would reset, almost certainly to a far higher interest rate. Michaelson had the temerity to question his superiors at this meeting. When they assured him that housing prices would keep rising for the foreseeable future, allowing problem debtors the option of refinancing, he asked whether they were “nuts.”

Michaelson’s superiors sought to assure him of their sanity—and that their numbers people had carefully evaluated the risks—and sent him back to do his job. This meant producing ever-greater loan volumes and beating out competitors, always portrayed as a noble, patriotic quest to put more people in homes. According to Michaelson’s account, no one in the top echelons at Countrywide ever seriously reckoned with the possibility that house prices could fall, leaving millions of homeowners with unpayable mortgages and putting mortgage banks like Countrywide out of business. After all, Countrywide was logging huge profits during the boom years, and that served to keep company brass blissfully ignorant of long-term trends in housing prices.

At times, Michaelson’s account of Countrywide’s corporate culture grows a bit too detailed. And the narrative is padded with peculiar office anecdotes—including an oddly precise account of the phrasings employed by Caribbean telephone sales agents, who, he tells readers, were not effective in marketing mortgages. While Michaelson is clearly critical of his former employer’s lack of foresight, he bends over backward to be generous to Countrywide and its sales tactics. At one point, he tells readers that he “never saw any evidence” of predatory lending practices or mortgage fraud during his time at the company. This statement has to leave readers wondering how hard he looked. Bank of America, which recently took over the company, agreed to set aside $8.4 billion to modify mortgages as part of a settlement in a suit with eleven states over Countrywide’s allegedly predatory lending practices.

Michaelson supplies a long list of policy proposals designed to prevent a similar disaster in the future. It is a mixed bag. For example, his foreclosure fault index, to determine which homeowners should be helped, would prove a painful morass if anyone tried to implement it. Requiring 20 percent down payments probably goes overboard on the harsh side. Readers who have followed the topic will find little new here.

Such oversights and redundancies inevitably limit the value of The Foreclosure of America. It’s one thing for Michaelson to confess he’s not a numbers guy, but he apparently declined to consult one as he rushed his story into print. While he may have had more common sense than his superiors, he still doesn’t fully understand what went on in the housing boom and bust. For example, the book tells readers that in the summer of 2003, “housing values were just beginning their stratospheric rise.” According to the Office of Federal Housing Enterprise Oversight’s nationwide House Price Index, in 2003 home prices had increased by more than 25 percent after adjusting for inflation from their mid-’90s levels; from 1895 to 1995, they had been flat. In other words, alarm bells should have been going off from the very beginning of Michaelson’s story, although the danger obviously increased as the bubble grew. Michaelson is inclined to be forgiving in his evaluation of everyone involved in promoting the bubble, from his colleagues to the Federal Reserve Board—but he might have been much less charitable if he knew the numbers.

The gist of The Foreclosure of America, Michaelson says, is to give readers an answer to what now, in the ruins of the boom, seems like the obvious question: What were they thinking? And the depressing, no-less-obvious answer seems to be: Not very much.

Dean Baker is codirector of the Center for Economic and Policy Research and the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2008).