World Of Trouble
How did the mortgage industry destroy itself and set off an economic collapse that ruined the finances of millions of Americans? Executives tend to hold themselves blameless, saying that no one could have seen the disaster coming.
Well, judge for yourself after you hear the story of Paul Bishop (update: Paul Bishop loses arbitration hearing), who worked at the nation's second largest savings and loan. World Savings Bank was among the industry's most admired mortgage lenders. But Bishop says the kind of lending practices he saw were leading to a world of trouble that would ultimately result in billions in losses and a federal investigation.
What does Paul Bishop say he told executives at World Savings, three years before the crash?
"We're breaking the law, okay? We're breaking the law. You know we're breaking the law. I know we're breaking the law. What the hell do you think is going on here? You know, you're granting too many people loans who simply can't qualify," Bishop told 60 Minutes correspondent Scott Pelley.
Bishop's story is a rare inside look at forces that tore the economy apart, as seen by a plain-spoken loan salesman who is now suing World Savings, claiming that he was fired for telling executives what they didn't want to hear.
"I definitely talked to him about Enron. I said, 'We're sitting on an Enron.' This is…bigger than Enron. I mean, we're doing four billion a month in loans. If housing drops, housing value drops, people start to default, you know? This is a nightmare. These people will not survive it," Bishop told Pelley.
Bishop was a mortgage salesman at World Savings San Francisco Loan Origination Center. He'd been a top salesman at IBM and spent years as a stock broker. Most everywhere he went, he had a reputation for speaking his mind and ruffling feathers. He joined World in 2002, in part, because of its history.
Bishop says the owners were Herb and Marion Sandler.
"And their reputation at the time was what?" Pelley asked.
"It was flawless, near as I could tell," Bishop said.
In fact, Herb and Marion Sandler were legendary. In 1963, they started Golden West Financial and grew to 285 branches under the name World Savings. The Sandlers' were known for careful, conservative lending. They've given away millions of dollars to charity and started an advocacy group for low income borrowers called the Center for Responsible Lending.
To read Herb Sandler's response to the story, click here
In 2006, just before the housing crash, the Sandlers sold their bank to Wachovia and pocketed $2.3 billion.
Trouble is, some of their money came from people like Betty Townes, who is financially ruined after being sold a series of World Savings mortgages she couldn't afford.
Asked how many times she refinanced, Townes said, "Well we refinanced practically every year."
World salesmen convinced Betty to refinance her mortgage four times in four years. She got about $20,000 each time. "Well, all I know that they told me this loan was best for me," she told Pelley.
But how could it be best when Betty's pension couldn't qualify her for the loans?
"They told me that they would go by my husband's payroll," she said.
"Even though he'd been laid off from the shipyard?" Pelley asked.
"No, he'd passed away," Townes replied.
Her husband, Ronnie Townes, was dead. World Savings noted that in her papers. But his former income was used to qualify Betty.
Maeve-Elyse Brown, a lawyer for a non-profit group working to save homeowners from foreclosure, says Betty Townes' actual income was about $1,875, but that the income written on her loan application was over $4,000.
Asked who did that, Brown told Pelley, "The interviewer that's listed is a staff person for World, for World Savings, according to the loan documents."
"What does that tell you?" Pelley asked.
"Looks like whoever typed up this document put in the number that they thought was the right number to get the loan approved," Brown said.
"The term was 'packaged.' It had to be packaged correctly when it got to the underwriter," Bishop told Pelley.
Bishop says a story like Betty's was common at his former office.
He says facts were manipulated on some loan documents to get past company underwriters who approved the loans. "You know, let's not say this. Let's delete these items that they're probably not gonna check on. Let's add this. Let's just move it around."
"Packaging the loan meant modifying [the loan]…to make sure it would pass the underwriters' inspection?" Pelley asked.
"Correct. It was one grand wink-wink, nod-nod," Bishop said.
One person you won't see in this story is Herb Sandler. For months, 60 Minutes invited him to sit down for an interview. But instead, he sent these letters.
Read Herb Sandler's first letter and his second letter to 60 Minutes.
He says it is "categorically false to suggest that we trained or permitted employees to falsify a borrower's income." Sander called it "totally unacceptable in our culture."
But Paul Bishop says he watched the bank famous for quality begin to emphasize quantity. World relied on outside mortgage brokers to bring in 60 percent of its customers. The more loans that were approved, the more the brokers, and World Savings, made in fees.
"We would have these instant underwriting events in an office where we would assemble five underwriters right there," Bishop told Pelley.
Asked how many loans would be covered in a single day, Bishop said, "80, 90, we would keep track of it. 80, 90, 100 would be reviewed, yeah. Oh, yeah."
By 2005, 38% of World's clients had subprime credit scores. And customers were shown fliers that told them their income would not be checked by the bank.
"So I don't really need to know what you make. I don't need proof. You tell me you make $200,000 a year? You make $200,000 a year," Bishop said.
"No verification?" Pelley asked.
"Not gonna check," Bishop replied.
Herb Sandler told 60 Minutes if there was no income verification, the bank still checked credit reports and appraisals. But 60 Minutes spoke to two former World salesmen and a former executive who made similar allegations to Bishop's. One said, "It was all about volume, quantity over quality."
To understand what was happening in the mortgage industry, 60 Minutes went to Bob Simpson, whose company, IMARC, investigates failed mortgages.
"When one lender dropped standards, another lender felt that they had to do the same," Simpson told Pelley.
Simpson says World and other lenders were in a ruinous competition for customers. "There are people inside of every institution that have been screaming for years about these terrible loans. Don't fund these. These are horrible loans. And they were routinely ignored inside of their own institutions."
Asked why they were ignored, Simpson said, "Because there's no money in common sense. There's no money in stopping a loan. There's only a payday when that loan closes."
The loan World was selling was potentially risky. It's called an option ARM, but at World it went by the cheerful name "Pick-A-Payment." The monthly statement offered four different payment amounts that the homeowner could actually choose from. But, the lowest payment didn't even cover the interest on the loan. Deferred interest would add up month after month, leaving the homeowner farther and farther behind.
That's what happened to Betty Townes. World sold her four Pick-A-Payment loans, racking up $40,000 in fees and deferred interest for the bank. Now her full payment is larger than her monthly income.
"Hard to think of Betty without a home," Pelley noted.
"It's horrifying to think of her without a home. It's just unacceptable," Maeve-Elyse Brown said.
And she's not alone. Between 2003 and 2006, the total amount of deferred interest from World borrowers, choosing that lowest payment, jumped from $21 million to $1.2 billion.
"That's the borrower saying to you 'I can't make my payment' or 'I'm not making my payment.' Now that was increasing at $100-million a month," Bishop said.
And that, he says, is when he began complaining to his bosses. "And basically it was characterized as, 'Look, you're a malcontent. I mean, you're not happy here. You don't like it here. You don't like the way we do business here.' I said, 'You know, it's all true. You know, it's all true. But, you know, you can't continue to do this.'"
Then in the summer of 2005, Bishop saw an article in the Wall Street Journal which Herb Sandler boasted about the soundness of the bank's loans.
Bishop told Pelley he complained, saying to a senior manager: "I think we have crossed the line. And there's no question in my mind that the chairman of the board, the founder of this bank, has no clue what's going on. Or he's indicating that in the press."
"Did you use the term 'predatory lending' with him?" Pelley asked.
"I'm sure I did. 'Fraud' for sure I used," Bishop said.
"And he said what?" Pelley asked.
"He said, 'Well, you know, I'm not aware of that,'" Bishop replied.
After that, Bishop got into a heated argument with a fellow employee and the bank threatened to fire him. He says it was retaliation for his complaints. So he talked to Tim Wilson, the corporate head of sales.
Bishop says he told Wilson: "'This is somebody's home. This is a home they can't afford. Okay? We are complicit in this, okay? You're granting too many people loans who simply can't qualify.' He said, 'I don't have any instance of that.' I said, 'Come down to Vicente Street. Pull 100 loans, any 100…down at my office.' I said, 'I don't have the ability to do that or I'd do it. Come down to the office. Pull 100 loans. You're gonna be stunned at what you see.'"
Asked if Wilson did that, Bishop said "No."
Wilson did write a memo about their conversation, saying Bishop could not point to "any specific examples of employees or loans that do not conform to company policy" and he noted that "random audits are done weekly all over the country."
In his letter to 60 Minutes, former bank owner Herb Sandler said there are hundreds of former World employees who would "dispute Mr. Bishop's claims and speak to the company's focus on quality lending." He makes a point of saying his bank kept its loans on its own books rather than selling the risk to Wall Street, which "created a strong incentive to ensure that our loans were based on sound underwriting." Still, since the market collapsed, World's portfolio has lost billions.
Bob Simpson asks, "What, in a managerial sense, failed? Your leaders either knew those loans were terrible, or they didn't know. And either answer is bad for World Savings."
"And when the Sandlers say 'We didn't know?'" Pelley asked.
"Shame on them. They should have," Simpson replied.
"What went wrong?" Pelley asked Bishop.
"Well we ran out of borrowers," he replied. "Everybody that could qualify, anybody that could fog a mirror, anybody that could just breathe, you know, and qualify at any level had basically been refinanced once, twice, three, sometimes four times."
Herb Sandler told 60 Minutes World approved only about 60% of its applications. He says his "high quality loans" wouldn't have failed "had the economic crisis not caused…housing prices to drop by 50%."
In May 2006, before the housing crash, Sandler announced he was selling World to Wachovia for $25 billion.
For Bishop it was the last straw. He says he told a manager he planned to warn Wachovia and days later, he was fired. Bishop says a lawyer told him to think twice before getting in the way of the merger.
"Did anyone at World ever specify why you were fired?" Pelley asked.
"To this day they have not," Bishop said.
Asked why he thinks he was fired, Bishop said, "I think I was right in the middle of $25 and a half billion dollars."
"Did you call Wachovia?" Pelley asked.
"I did not," Bishop said.
Asked if he regrets not making that call, Bishop said, "I'll always regret it. I'll always regret it."
The losses from the Pick-A-Payment portfolio are now estimated at $36 billion. Wachovia was so badly wounded, it was acquired by Wells Fargo with the help of a taxpayer bailout.
"We have talked to some former executives of the bank who tell us that they listened to your complaints, they investigated your complaints, and they found that there was nothing to them," Pelley told Bishop.
"Are they employed today?" Bishop asked.
"No," Pelley said.
"Surprise. They lost their job. The bank went bust. They took down the fourth largest bank in the country with them. But there was no problem," Bishop replied.
Produced by Graham Messick
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