Executive Summary
“Busted: Life Inside the Great Mortgage Meltdown,” by Edmund L. Andrews provides us with an eloquent account of the housing crisis from an inside perspective. Andrews, a New York Times economics reporter spent the majority of his career writing and interviewing some of the most brilliant economic minds of our era. Andrews has followed the likes of Alan Greenspan and Ben Bernanke; he has written many articles in regards to the housing crisis and the early warning signs of a housing bubble. Nevertheless, in 2004 like millions of Americans, Andrews plunged into the world of “exotic mortgages” and “subprime” bargains (Andrews, 2009). It is from this inside perspective on the brink of bankruptcy that Andrews is able to take us through his irrational journey of pursuing the American dream.
Andrews goes into the personal intricacies of why he did it and how easy it was. He reasons that the “money was there, and [he] was in love” (Andrews, 2009). Eager to start a new life, he gives in to the temptations of home ownership and begins his absurd escapade into the realm of a mortgage nightmare. It is within the story that Andrews implies how he developed into a connoisseur of “exotic loans,” that indulged in the most daunting. He provides the audience with a glimpse of the inner-workings of the reckless financial industry with its fast cash lenders. Andrew states that the catalyst that brought it all crashing down was the reckless distribution of subprime loans and its repackaging in Wall Street. It is through Andrews’s analysis of the housing market, from a consumer’s perspective, that allows the audience to fully understand how conniving and unscrupulous mortgage companies were in financing risky individuals and their dreams.
The story illustrates how Wall Street and its pundits promoted securities that were huge bundles of risky mortgages, and how the so-called experts were oblivious until it was too late. He eludes that mortgage companies profited off of risky borrowers with complicated loans at substantial rates. In Busted, Andrews also goes on to reveal how established rating agencies unethically colluded with Wall Street and financial institutions in order to increase revenues at the expense of eager homebuyers.
In conclusion, Andrews’s story is one of many ups and downs that bring to light the greed of Wall Street and the ambition of individuals in their pursuit of the American dream. Throughout the story, Andrews discusses in large the economic crisis and how its implosion intertwined with his personal life. How the financial strain of trying to make the mortgage payment nearly destroyed his marriage. In the end Andrews was ultimately left with zero savings, a broken marriage and facing foreclosure.
The Ten Things Managers Need to Know fromBusted
One concept managers should take away from this book is that one should always act ethically, because unethical behavior will ultimately lead misfortune.
2. When pursuing a personal interest always make decisions that are based on sound judgment rather than emotions.
3. Every goal big or small should have a plan.
4. When presented with a problem or a complex situation teamwork can expedite a solution.
5. Always read a contract and know what you will be getting into before you sign it.
6. Business is always evolving and as a manager, one should be flexible and willing to adapt.
7. Take your time on making decision, especially big decisions.
8. Manager should search for the correct answers not just the ones in front of him.
9. There is no such thing as something for free and thus one should consider the trade offs.
10. Sometimes the hardest things to do are admit when you are wrong.
Full Summary of Busted
Money for Nothing
It was December 2007 and the housing market was in a severe downturn, the doom and gloom speculation was now a reality. The ease of the no-interest, zero down payment, “exotic mortgages,” set the stage for massive home devaluation, “Delinquency rates and home foreclosure rates were soaring” (Andrews, 2009). Ironically, Edmund Andrews an economic reporter for The New York Times was lured like millions into financial ruin pursuing of the American Dream. Everyone had their own rationale for plunging into a housing market that was characterized by fast cash and shady mortgages. Andrews’s justification was “love,” it was 2004 and he was finalizing his divorce and ready to start a new chapter in his life. Andrews wanted to get married and buy a home; equipped with a letter of pre-approval for 0,000 from American Home Mortgage he was precarious and in love. This was also the story Andrews disclosed to the former chairman of the Federal Reserve Alan Greenspan as an explanation to why he did what he did. Andrews took a gamble like millions of Americans in “overpriced real estate” with a “reckless mortgage” (Andrews, 2009). Andrews’s “reckless mortgage” was called a “no ratio” mortgage, and consisted of a verification of assets with no confirmation of the debt-to-income ratio (Andrews, 2009). As illogical as it might sound, American Home Mortgages like many other mortgage companies were willing to overlook the financial situation of their borrowers in return for a higher interest rate. It was this and Andrews’s lust for the imaginable along with the whispers of “Bob,” (Andrews mortgage broker) “I am here to enable dreams” (Andrews, 2009).
Prudence is for Losers
The money was available and love was in the air; that was the rationale that provoked Andrews’s to take the plunge into an already unstable and over inflated housing market. Even when many economists were warning of a looming housing bubble, many ignored the signs. Housing prices climbed and interest rates plummeted each induced by speculative market growth and the availability of monetary funds contributed to the swelling of the housing bubble. Logic dictated that many of the homes Americans were purchasing were overpriced but the market dictated the reality of the situation. A situation where risk was irrelevant and the market rotated it in a symphony of musical chairs. It was 2004 and Andrews, like many Americans entered the housing market at the peak of the subprime era tantalized by the “’fast and easy’ low-doc mortgages” (Andrews, 2009). It was Ditech’s founder, Paul Reddam who explained it best;
“The Mortgage industry is built on three legs. The first is a person’s ability to pay. The Second is a person’s willingness to pay. And the third is the amount of collateral a person is willing to put up. People began to realize that you could knock out one of those legs, charge a higher interest rate and still have a very good business. What happened is that they started knocking out all three legs at the same time” (Andrews, 2009).
My Lender Drinks the Kool-Aid
“It felt vaguely exciting, edgy, and a little gangsta,” these were the terms Andrews used to describe the exhilaration of the moment (Andrews, 2009). It was mind-boggling to Andrews the simplicity and ease for which he was able to acquire half a million dollars. It was this ease and simplicity of instantaneous wealth that would devastate the financial stability of many Americans, to include Andrews. However, Andrews also hesitantly wonder who could be behind such reckless behavior, who was the one willing to gamble boundlesson such risky borrower. This man was Michael J. Strauss, the chief executive and owner of American Home Mortgage, a once conservative mortgage lending company. It was in 2004 that Strauss renewed his strategic targets moving from a fiscally responsible one to a profit orientated one. Conversely, Strauss not only drastically changed his operation but got greedy with the risk. The colossal profits being achieved by the smaller unscrupulous mortgage companies that believed that “no borrower is inherently too risky for a loan,” were too much for Strauss to let slip away(Andrews, 2009). It was the greed of everyone involve that enabled the situation and the system provided the incentives.
Magical Thinking, Real Debts
It was in January, less than four months since bought their home when the reality of the situation became real. Andrews verify through his ATM receipt he was for all intents and purposes broke. When they purchased the house they had a ,000 cushion from the selling of his stock and now his bank receipt read 6. Andrews is stunned at the pace of their spending and assumed that Patty would be more successful in her quest of a job. This was the “magical” thinking on Andrews’s part. He thought Patty would reenter the job market be successful and they would have enough to get by. In this chapter Andrews reveals the growing tension between Andrews and patty.
Alan Greenspan
In this chapter we are reacquainted with Alan Greenspan and taken through his economic thought process. After all, it was Greenspan that was chairman of the Federal Reserve at time which was responsible for “conducting the nation’s monetary policy, supervising and regulating banking institutions while maintaining stability of the financial system and containing systemic risk that may arise in financial markets.” (System, 2010)
Greenspan was free market theorist who discounted the need for much regulation. Greenspan would say, “That it could guide and regulate itself through the power of rational self-interest” (Andrews, 2009). Nevertheless, the warning signs of the looming “foreclosure crisis” were all there and one member of Federal Reserve was warning for years (Andrews, 2009). That person was Edward M. Gramlich, a Federal Reserve governor who fought for years for more stringent regulatory action that would protect consumers and slow the looming and ever so growing housing bubble.
Conning the Con Men
It was now 2006 and although it might have seemed as though Patty and Andrews had survive the worst of it, their financial situation continue to be bleak. Their wedding was fast approaching and with Patty’s new job as editor taking home 60,000 a year things appeared better but the truth was they were drowning in debt. They had maxed out their credit cards, emptied their savings and obliterated credit rating. Then life got even worst, six hours before their wedding, Patty wrecked their vehicle which they had dropped the collision insurance on beforehand to save some money. So now with no spare cash or credit they would have to come up with the 2,600 required for repairs. This mishap would send Andrews calling for Bob’s services again, like a “crack addict calling up [his] dealer” (Andrews, 2009).
Bob had quit American Home Mortgage, moved to Denver and was now working for a brokerage firm called Vertex Financial. Andrews explained his situation to Bob and his hopeless need for some equity to help facilitate his aspiration of climbing out of the financial abyss he so recklessly plunge into two years earlier. Andrews contemplated ransacking his 401K but Bob was able to reason with him and offered a two-step solution. Bob would have Andrews borrow against the equity in his home to pay off his credit cards thus raising his credit rating and then refinancing his home with a lower rate consequently having Andrews paying 0 less per month than previous with both the credit cards and the mortgage. The scheme Bob employed did alleviate some of the financial weight for a short time but their money woes kept on growing straining their love.
In Search of the Smart Money
As the housing bubble reached its climax, investors were turning a profit on subprime loans transformed into securities with a triple-A rating. As fast as the mortgage companies could finance risky borrowers with subprime loans and exaggerated rates they were selling them. It was a ponzi scheme based on no logical or past data to support their rating or how they would perform in the future. Nevertheless as shady as subprime mortgages bonds rated as triple-A might seem, we would now be introduce to its ugly step-sister “collateralized debt obligations” (Andrews, 2009). CDO were basically the securities that were backed by subprime mortgages. It was a passing of risk and it would eventually be followed by increased default rates.
Over the Cliff
Foreclosure and delinquency rates were beginning to rise; it was the commencement of the end for subprime loans and reckless lending. It was less than three months since Patty and Andrews signed their refinance loan that their lender declared they would stop financing risky borrowers. But for Patty and Andrews they had bought themselves some “breathing room” (Andrews, 2009). However, their relief was short lived, Patty was fired and it was now time for a new strategy. It was time for Andrews to be courageous and put his pride aside, it was time for Andrews to ask his mother to borrow some money. Andrews borrowed ,000 and despite their new influx of cash, tension between Patty and Andrews continued to escalate. Money and Patty’s job search were the constant theme of their augments and their angst continued to build.
Enablers of Disaster
In this chapter Andrews goes on to explain how the subprime mortgages started to bring down the financial system. It was 2007 when Moody and Standard & Poor, two rating agencies downgraded mortgaged backed securities leading to many bankruptcies. The time of reckoning had arrived; reckless mortgages and the bundling of them into securities had come to an end. The same rating agencies that pleased many with their triple-A ratings also sent financial institution along with Wall Street to their downfall.
Bull in the Subprime shop
By 2006, there was a fundamental shift in the market in how investors received mortgage backed securities. Investors no longer cared about credit quality mortgages but mortgages that paid more interest rates. Andrew described it as being that “the market preferred sleaze over safety.” It was these fundamental shifts from safe to profitable that ultimately incentivize individuals to seek risky loans with higher rates, driving the market in a new direction.
Chapter 11: Public Flailing, Private Failing
It was 2007 and Wall Street had accomplished grabbing the attention of Washington. With Wall Street in crisis and the economy slowing and foreclosure on the rise, Washington could no longer ignore what was happen in the mortgage industry. Politicians began debating how to help troubled home owners and get the economy going again. However this would lead to little action for some time as Washington seemed unprepared for the financial crisis facing the nation and many homeowners.
Chapter 12: Reverse Redlinning
Redliningcan be defined as “the practice of denying, or increasing the cost of, services such as banking, insurance, access to jobs, access to health care, or even [mortgages] to residents in certain, often racially determined, areas” (Redlinning, 2010). However, during the housing bubble just the opposite was happening, there was reverse redlinning. Andrew points out that minorities who where often denied mortgages where now being targeted with subprime loans. It was there poor credit ratings that made them so beloved in the lenders eyes. Enticed with the prospect of owning a home with zero down and an unstable credit rating, they steered into high-cost mortgages. Andrews points out in his story to various examples and studies that supported the claim that minorities and low income individuals were being targeted in the subprime race.
Chapter 13: God Help Us All
Andrew concludes his book in 2008 with the advent of Christmas. It is here were we are exposed the extreme nature of his situation. How Patty and Andrews relationship that was once characterized by love and support has warped into a one of mistrust and resentment. It has been four years since the beginning of their foolish adventure and now they wore broke, their marriage was failing and they had falling thirty days behind in their mortgage. Andrew also goes to point out that even though their case was more extreme than some, it was not unusual. In the end, Andrews leaves us wondering, what happen?
Personal Insights
Why I think:
With business conditions today, what the author wrote is no longer true – because:
The instance in when the book was written was when the financial industry and Wall Street were characterized by easy money and loose monetary policies. It was these characteristics that allowed the housing bubble to expand to monstrous stage. Today, in large part due to the housing crises we tighter regulations and more conservative lending practices.
If I were the author of the book, I would have done these three things differently:
1. I would have included more examples of other home owners in the similar position. Other people with the different types of “exotic loans”
2. I would have also included all the facts of the situation, to include Patty’s bankruptcies. I wouldn’t leave certain aspects out that could lead critics to reevaluate the motives of my situation.
3. Finally, if I were the author of the book, I would have concluded the book with a resolution. Explain to my audience what I was doing to repair the situation and how it was working.
Reading this book made me think differently about the topic in these ways:
1. After reading this book I understand how so many Americans were able to be enticed into to making risky financial decisions.
2. I have a better understanding of the interworking of the real estate market and how Wall Street and its mortgage-backed securities helped to contribute to the housing bubble.
3. I now also see how easy it was for financial institutions to practice such reckless lending practices by distorting certain terminology within mortgages in order to turn a profit.
I’ll apply what I’ve learned in this book in my career by:
1. Analyzing problems from different aspects, for there could be many solutions to the same problem.
2. By being patient and allowing adequate time to evaluate every situation.
3. Remembering that if it is too good to be true, proceed with caution.
Here is a sampling of what others have said about the book and its author:
“What others (scholarly and magazine reviews – along with on-line reviews – not simply reviews off the back of the book) have said about the book and its author?” (Insert: Write a synthesis and summary of these often varying perspectives – this is to be followed by a bibliography of physical and web sources consulted – not simply a print-out of them – in the next section).
In some of the reviews on Amazon.com many of the readers find Andrews portal of his financial situation embellished with half truths and a product of his own doing. Yvonne from New York believes that Andrews is basically a “whiner”.
Then there is David Michmerhuizen from California that believes that Andrews should have known better and that his story is just an illustration of Andrews conniving scheme. Michmerhuizen uses the fact that during the time period of writing busted, Patty declares bankruptcy for the second time but which Andrews so conveniently omits. Michmerhuizen argues that either Andrews is an idiot or just plain lying.
However, there were some positive reviews, for example Caroline interprets Andrews’s story as a love story. It is a love between Andrews and his dreams and the financial system and money. Caroline is also impressed how Andrews is able to personify the housing market.
Bibliography
Andrews, E.L. (2009). Busted : life inside the great mortgage meltdown. New York, N.Y.: W. W. Norton & Company Inc.
Federal Reserve System. (2010, March 29). In Wikipedia, The Free Encyclopedia. Retrieved 03:54, March 31, 2010, from http://en.wikipedia.org/w/index.php?title=Federal_Reserve_System&oldid=352822725
Redlining. (2010, March 28). In Wikipedia, The Free Encyclopedia. Retrieved 10:08, March 31, 2010, from http://en.wikipedia.org/w/index.php?title=Redlining&oldid=352485241
Contact Info: To contact the author of this “Summary and Review of Busted,” please email Ariel.Vernazza@selu.edu.
Biography
David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:
Management Concepts (http://toptenmanagement.blogspot.com/)
Book Reviews (http://wyld-about-books.blogspot.com/) and
Travel and International Foods (http://wyld-about-food.blogspot.com/).
Written by David Wyld
Professor of Management, Southeastern Louisiana University
