When Bad Loans Happen to Good People: The Horror Story of the “Monster”


While much of my academic career has been spent studying how families get credit to buy homes, the past few years have made me much more aware that simply getting credit isn’t a goal in itself. No, if the credit isn’t sensible and sustainable, the pain can be far worse than any gain that could have resulted.  Consider these stories…

You would have never known, unless you were trained to look for the signs, that Clarence and Wendy Wincentsen were a good mark. They weren’t poor. They weren’t uneducated. They had $300,000 in savings, and they had a perfect credit score. Almost nobody has a perfect score. These were good borrowers. They never should have gotten a bad loan.

But Greg Walling found opportunities where other loan officers might not. He noticed the little things, like how they forgot their reading glasses. That was good because he didn’t want them to read the loan documents.

Plus, he had the Track.

The Track was more than a sales technique. It was psychological manipulation, honed to a precise algorithm. The company called it, innocently enough, “A Loan Officer’s Track to Run On.” The loan officers knew better. They weren’t trying to make loans. They were trying to “find the pain.” They were taught to leave the room and come back and reintroduce themselves twice because customers would subconsciously see them as friends if they’d met them multiple times. Then, they’d leverage this friendship to ask them about their marriage, their bills, their savings, all in the pursuit of finding that pain point where they could be talked into “needing” money. When customers had objections, they’d evade. They’d change the topic. And they’d be so smooth, you wouldn’t even notice they were doing it.

For the Wincentsen’s, it was their car loan. They wanted to pay it off, but they didn’t want to spend so much all at once.

Greg Walling had a solution. He’d refinance their mortgage, and they could take out enough cash to pay off the car loan. In order to make a profit himself, however, he’d have to convince them to pay a higher annual percentage rate (APR) than they were currently paying.

When they got to this point in the Track, the training manager would leave the room. A new guy would come in. One of the company’s top sellers. “Put down your pens and pencils,” he would say. “Cut off your tape recorders.”

Then he would teach them the Monster.

The trouble with APR, from an unscrupulous loan officer’s perspective, is that it includes the entire cost of the loan—not just the interest and principal payments, but the upfront points and fees too. That’s why the government requires them to report it. It tells the borrower the true cost they’ll be paying. It makes it harder for guys like Walling to pad the loan with hidden costs.

The Monster was the loan officer’s way of convincing the customer that APR didn’t matter. He’d show them a hypothetical comparison of two borrowers with the same interest rate and the same fees. One would have a fifteen-year mortgage, and the other would have a thirty-year mortgage. He’d point out that the thirty-year borrower would wind up paying more, even though their APR is the same, because they’re paying the same interest payments for twice as many years. Then he’d get them to admit that short-term loans are better, even if they came with a higher APR, because they’ll save in interest payments in the long run.

When the Wincentsen’s walked out of Greg Walling’s office, they had refinanced their mortgage and cashed out $15,000, and they owed $12,000 in points. The Monster worked.

The Wincentsen’s were one of many caught in this trip.

There was Michael Austin, the 48-year-old machinist who wanted to refinance his mortgage but didn’t want to pay the APR he was being offered. So the loan officer told him it wasn’t binding and convinced him to sign the documents. Austin went home and changed his mind, but the loan officer told him he couldn’t back out now. “You’re going to lose your house,” the officer said to Austin, who was on the verge of tears. “You’re going to ruin your credit forever… C’mon Mike, this is a good deal… This is what you want. This is what you need.” Austin signed the final loan, which wound up costing $20,000 more than he thought it did.

There were the Berringers, who after 56 years of marriage tried to pay off their credit card debt by refinancing their mortgage, only to find that they now owed $18,000 in points and fees that they couldn’t afford. So they took out a reverse mortgage, which allowed them to keep the home but took away all their equity, including their ability to pass their home on to their kids and grandkids.

These stories, and many others like them, come from Michael W. Hudson’s The Monster, one of the great feats of investigative journalism to come out of the recent housing bubble. Hudson’s work makes clear that predatory lending is real, which many people know. What makes the book particularly eye-opening is that each of these borrowers suffered at the hands of one of the largest, most prominent mortgage lenders in the modern era. Predatory lending is real, and it is more pervasive than most Americans realize.

“Every closing that we had really was a bait and switch,” said one loan officer. “’Cause you could never get them to the table if you were honest.”

To be fair, I don’t ascribe to the view that all loan officers behave in this shameful way, and don’t think you should either. There are many upstanding and honest people in the industry. But when I studied the history of mortgage lending, and sadly, I discovered schemes like these were certainly nothing new.

In a new paper with my colleague Anthony W. Orlando, I trace the ebb and flow of these predatory lending schemes over time, each one landing the nation in a financial crisis when the borrowers inevitably default on loans they didn’t understand and couldn’t repay. No amount of innovation in the market has stopped these rip-offs. On the contrary, the more complicated our financial instruments have become, the more education we as consumers need in order to protect ourselves.

Unfortunately, most Americans aren’t getting that education. Over 40 percent of Americans don’t even understand enough of the basics to qualify as “financially literate”.

Fortunately, we did not end the paper there.

We found hope in a number of promising programs that have recently been evaluated by top researchers. One pilot program, tested during the bubble in Chicago, required risky borrowers to meet with a financial counselor before they signed the loan. Another program in Tennessee required homebuyers to attend classes. A similar experiment by the Federal Reserve Bank of Philadelphia offered a two-hour counseling session to first-time homebuyers. In all three cases, the result was a significant improvement in borrowing behavior and outcomes.

These programs were temporary and small, and they do not overturn the results of other programs that have not worked as effectively. But they provide a glimmer of possibility from which we should draw strength. The fate of the Wichtensen’s and the Berringer’s and Mrs. Pittman and Mr. Austin need not be the fate of the next generation. Nor should it be.

By the time Greg Walling finally came forward as a whistleblower—“even a thief has morals and ethics,” he said—countless homes had been ruined. In our next post, we will propose ways to prevent this tragedy from recurring—not just by reducing these risky, expensive loans, but by replacing them with affordable options that treat each person and their home with the dignity and respect they deserve.

The Invisible Cost of College: Students Who Can’t Afford a Secure Home


I love teaching. I love getting to know my students, challenging them to think in new ways, and engaging them in a conversation centered around important questions. I love seeing their passion to solve great problems, and I love sharing what I’ve learned to help them solve those problems. That’s why I write blog posts like this one. Last November, for example, I wrote about homelessness. I talked about the homeless Los Angelenos I passed by on my way to the airport. I felt for them. I vowed to help them. But it wasn’t until I started writing this post that it occurred to me that some of them could be my students.

At least 56,000 college students are homeless in the United States today. Some have been found to attend the University of Southern California, where I teach. Just down the road from us, California State University has found that one-tenth of its students is homeless. If true, we are significantly underestimating the problem nationwide, because most of these students don’t tell the federal government that they’re homeless when they apply for federal aid. We really have no idea how high the number goes.

How is this possible?

Let’s start with the fact that room and board at the average public, four-year college costs more than the tuition itself. Next, remind yourself that the student housing isn’t available when school isn’t in session. This makes children from abusive families or without families, even when they get student housing, especially vulnerable; they can’t go home for Christmas like everybody else.

The problem is so severe that college students in one survey were three times as likely to be living in a homeless shelter as the rest of the city’s residents. In another city, 68 percent of homeless youth between the ages of 18 and 21 had attended school that year. Far from the stereotypical portrait of homelessness in America, these kids are smart and studying and striving. And they’re struggling to get to school safe and on time, let alone pass their courses.

They’re not the only ones struggling.

At City University of New York, 42 percent of students were “housing insecure,” with problems ranging from not having enough money to pay rent, to leaving because they felt unsafe in their home, to experiencing foreclosure. In Wisconsin, Sara Goldrick-Rab, one of the country’s leading experts in higher education, surveyed students receiving financial aid and was shocked by what she found. “We expected to hear them tell us that they were having trouble affording their books or buying a laptop,” she said, “but what we heard about was food insecurity; one student told us that she was living in a shelter.”

College is expensive. We all hear the stories about soaring tuition and burdensome loans, and those concerns are well-founded. But they are only part of the picture.

A college career, like everything else in our lives, begins at home, where we study and sleep and have our breakfast before each day of school. An overwhelming body of research has shown that schoolchildren perform poorly and develop slowly when their home environment is stressful or unsafe or unaffordable. Why would we expect it to be any different when these children graduate and go off to college?

This hard reality was an important motivation for why Enterprise Community Partners started its Make Room campaign. The goal of Make Room is to put a spotlight on housing insecurity and galvanize forces to fight to prevent and eliminate it. Great progress has been made, and I’m hopeful that its effectiveness will only grow in the coming months and years. (Full disclosure: I serve on the Enterprise board.)

That campaign aside, when we look at what’s happening out in the field we can see that solutions exist. The state of Washington is partnering with Tacoma Community College to target Housing Choice Vouchers to full-time students who are homeless. The state of California is requiring its colleges to give foster youth priority for housing. Other colleges have hired administrators solely to find and assist homeless students. But, sadly these independent programs are not enough.

The great challenges of our time do not exist in any one silo, but rather at the interstices between them. When I was at HUD, we spoke often about “housing as a platform” and the many ways that housing matters for issues far afield from basic shelter. The problem of housing insecurity for students, with its negative effects, is a classic example of this, and recognizing this reality points to a pathway to systemic success.

Only by creating a dialogue between leaders in both higher education and housing can we solve either problem. Better, more affordable housing will improve education, and better, more affordable education will improve housing.

Once you realize the connection, it’s impossible not to see it everywhere you look. If you do, you’ll see something astonishing: an entire generation that wants so badly to study and learn and make something of themselves that they are willing to make deep sacrifices so that the lack of a secure home does not deter them in the classroom.

They are the reason I teach. They are the future.

The LGBT Experience at Home in America


When people talk about home, usually they have in mind the place where they cook their food, store their belongings, relax and recover from the day’s activities, bathe, and lay their heads to sleep. But for many, this isn’t right. For them, home is quite a different thing. It is where they can live without fear and loathing and avoid the hatred of others. It is a place where they can comfortably be who they are.

I was supposed to write a blog post about LGBTQ housing discrimination. That was it. Then Orlando happened and it made me focus directly on the many meanings of home, though I guess I’ve always known it on some level. Reading about Omar Mateen, the man who killed 49 and wounded 53 at a nightclub catering to the lesbian, gay, bisexual, and transgender (LGBT) community on June 12, these past few days, and how angry and unsettled he was in his acquaintances’ recollections, I keep coming back to an old James Baldwin quote from the Jim Crow 1950s.

“I imagine one of the reasons people cling to their hates so stubbornly,” he said, “is because they sense, once hate is gone, they will be forced to deal with pain.”

I see it all around us. I see it in the stories I read about Omar Mateen. I see it in the presidential election, and the calls to discriminate against this or that kind of person. I see it in state laws being passed around the country to allow companies to deny services to LGBT people. They allow employers not to hire them, landlords not to rent to them, and doctors not to treat them.

I do not think, if James Baldwin were here today, he would be surprised to see what is happening. Disappointed, but not surprised. He was a gay black man at a time when it was not safe to be either gay or black. He knew hatred, and he knew pain. He knew them so well that he fled from them, all the way to Paris, where from the age of 24 to the end of his life, he made his home. The last straw, the one that made him leave New York City, was when his best friend killed himself by jumping off the George Washington Bridge. If he stayed, Baldwin feared he would follow.

“You say the city beat him to death,” an interviewer once said to him. “You mean that metaphorically.”

“Not so metaphorically,” said Baldwin. “Looking for a place to live. Looking for a job. You begin to doubt your judgment, you begin to doubt everything. You become imprecise. And that’s when you’re beginning to go under. You’ve been beaten, and it’s been deliberate. The whole society has decided to make you nothing. And they don’t even know they’re doing it.”

Times have changed, but not enough.

There was a time, say around June 11, when most Americans would have said that it was finally safe to be gay in this country. Now they’re not so sure.

The reason people went to that nightclub—the reason LGBT people go to so many nightclubs—is because they don’t feel safe. They don’t feel, when they walk down the street, that they can be themselves, that they are wanted or even accepted for who they were. They are denied housing. They are denied jobs. They are charged higher rents. They are paid lower wages. Discrimination against LGBT people is real—and studies show that it continues to be real and statistically significant across the country.

The shooting in Orlando brought home to the forefront. And so, I was reminded, as I have been so many times since I started writing for Home Matters, that home is about more than housing. For many of the people in the club that night, Pulse was more of a home than any house they had ever lived in. For many of them, it was there that they truly felt free and equal and safe.  It was Baldwin’s Paris.

They weren’t just attacked in a nightclub. They were attacked in their own home.

Where do they go now? Where do any of us go when we have no place to call home?

In the days after the shooting, stories revealed that some of the people who were killed had not come out to their families. For them, our kind of home was not theirs, and they needed an alternate like Pulse. Tragically, for them, it turned out they weren’t even safe in their alternate home. Others inspired by the horrific event have come out in the days since, an important step in creating home in other places. I hope they are successful.

I think we have to broaden our concept of building a home. The homebuilding we need, more than anything, is not just wood and concrete. It is, first and foremost, freedom from discrimination and freedom from danger.

Then, and only then, with safe spaces and equal rights, can we begin to deal with the pain, and with it, the hatred, until one day, when we may finally live in peace.

The Education Trap: How Our Homes Make or Break Our Children’s Opportunities


It’s hard to write about education knowing I could have been, but wasn’t, denied all the opportunities that have come my way. For all the decisions we have control over in life, where we go to school as children is not one of them. Yet, of course, it’s one of the most important.

Where I went to school, in suburban America in the late 1970s and early 1980s, test scores were among the best in the world, and so were college enrollment rates. My own experience was a testament to both. Had I grown up elsewhere, I doubt I would been so lucky—or done so well in my subsequent career.

In this country more than in most, the quality of education is strongly tied to location. American schools receive the majority of their funding from local, rather than state or federal, taxes. Those who earn more, spend more. As a result, they usually get more in return.

For a long time, economists only had descriptive evidence suggesting that housing values were to blame for this disparity. Then, in 1999, Sandra Black wrote a now-classic paper in the Quarterly Journal of Economics that confirmed what most of us had suspected all along. Black collected test scores and housing prices for a variety of Boston suburbs, and she separated them by attendance districts. In neighboring districts, she compared households close to the border. On either side of the border, the households lived in the same neighborhood. They had the same demographics. They were, by all relevant metrics, identical. The only difference was the school their kids attended.

Black found that kids living in more expensive houses attended schools with significantly higher test scores. Just to move across the border to a better school—less than one-tenth of a mile in many cases—would cost a family thousands and thousands of dollars. One can only imagine how large the gap is when the good schools are even further away.

This is not a problem that solves itself. On the contrary, it compounds over time. Children in poorer households are precisely the ones who need a better education to navigate our network-oriented employment system and complex financial system if they want any chance at escaping the disadvantage into which they were born. Instead, they wind up in a cycle of lower-end jobs and limited access to credit that leaves them with few choices, with their kids winding up in the same low-quality schools, perpetuating the disadvantage down through the generations.

What a counterproductive irony.

In development economics, there’s a term for this vicious cycle. It’s called a “poverty trap.” Developing nations often face this problem when they can’t afford to invest in the improvements that they need to escape their low standard of living.

But—I can’t stress this enough—we are not a developing nation. We are not lacking resources. We have ample means to invest in homes and neighborhoods where parents can’t afford to provide a quality education for their children.

And, what’s more, we know how to do it.

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Every other year, the American Economic Association awards the John Bates Clark Medal to the “best” economist under the age of 40. In some ways, it’s even harder to win than the Nobel Prize. This year, it went to an economist from Harvard named Roland Fryer, who has devoted his young career to finding and understanding successful strategies to boost achievement in disadvantaged students. What Fryer discovered may forever change the way you think about education.

When most people hear the word “education,” they picture a school. That’s why, when politicians talk about improving education, they focus on things like class size, per-pupil spending, and teacher training. Fryer found that none of these things are correlated with better outcomes. In fact, in multiple papers with various co-authors, Fryer has found that sending kids to better schools only reduces the “achievement gap” by a small fraction.

Education, Fryer teaches us, is not just a school. Education is a community. Education is home.

The most effective education, according to Fryer’s research, is a program like the Harlem Children’s Zone, which combines high-quality schools with community programs. They prepare the kids before they’re old enough to attend school. They run after-school programs like karate, dance, and tutoring. They counsel the students through the college admissions process. They offer health services and even tax preparation services to the families.

When you really think about it, Fryer’s work isn’t surprising at all. Those of us who had the good fortune to grow up in stable homes and communities know that we were shaped and guided and aided by more than just our classrooms. We had parents and doctors and mentors and coaches who helped us and encouraged us and gave us what we needed to excel in those classrooms.

The only surprising thing is how easily we forget all these diverse factors that make up a child’s education.

Education starts at home, and the influence of that home doesn’t end when children go to school. They carry their home everywhere they go, from the sense of safety they feel in their neighborhood to the resources they can access in their locally-financed classroom.

Some of us grew up in homes that afforded us the educational opportunities we needed to achieve the American dream. Many did not. For them, and for the generations who will come after them, we must break this persistent trap.

These are our children. They didn’t ask to be born into their homes. They didn’t choose to go to their schools. It’s up to us, as guardians of our nation’s future, to open the door for them to access the America we have been so blessed to enjoy.