"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."
"So, they were getting paid to buy a house?" Kroft asks.
"They were getting paid to buy a house. Yes. Yeah," Abbott says.
And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.
"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.
Abbott says borrowers got the money, without a down payment.
Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I.' And he'd pass it on to Wall Street," Grant says.
"And he got a cut, too?" Kroft asks.
"Yes, oh, yes. Everyone gets a cut," Grant says.
Almost all of the people involved in the transactions made huge amounts of money, then passed the risk on to somebody else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them resold the mortgages to big New York investment houses.
Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor's.
"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.
It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.
All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.
It's not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.
"Did you understand any of this?" Kroft asks.
"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.