











Living the American dream





Ramos laughs when she recalls the amazement of friends and family at how she'd exchanged business suits and high heels for old sweatpants and rubber boots. "It broke my heart to give up those suits," she says, but jokes that she'd just traded slinging one type of mud for another.




Using the proceeds from the sale of her parents' Hawaiian home, she was able to buy the house free and clear. No mortgage, no debt.


"I love to mow," she says. The business grew to about 40 customers, she recalls. "We were doing good."

"A little bit more to catch up"



Collection agencies began to hound Ramos. When Shearer visited her friend, "I would hear the calls coming in. It gets to a person after a while. I did see Sheila being worn down." The women had been friends for two decades, but "this was the first time where I heard her calling me and crying and saying, 'Elaine, I don't know where to go, I don't know what to do.'"

It was around the holidays, Ramos recalls, when a postcard came from Equity Trust Mortgage, proclaiming her eligible for another mortgage. She threw out that postcard, but the company ran classified ads at the time under the headline "REFINANCE NOW, LOW RATES" and promising, "Aggressive Programs: Fast Approvals, Fast Closings. Programs from good to poor credit. Non-income OK, limited credit OK. We can tailor a program for you. Call 24 hrs."

Ramos remembers thinking, "Maybe I'll just get a little bit more to catch up." She landed a $140,000 mortgage and paid off the $90,000 one she had used to launch her business.

Before moving to Florida, she'd never taken out a mortgage, she says, and was inclined to trust the mortgage broker, Stan Petersen, who ran Equity Trust Mortgage. He assured her it was OK, she recalls, and she didn't pay much attention to the details when she signed the paperwork.

After the old loan and numerous fees were paid off, the new loan brought her enough to buy a car and pay off her other debt but little else, she says. Then there was the monthly payment: It started at $1,150, more than the one on her last mortgage, which she hadn't been able to pay. She swore off credit cards. Still, she says, the new mortgage left her "just surviving."


Around this time, one of her sons wanted to live on his own. So, five months after getting her new mortgage, Ramos took out another $28,000 loan against her home to purchase a trailer for him. It didn't add to her expenses because her son made the monthly payments.


At this time, she, her mother and granddaughter were still being treated for their injuries. She'd hired a lawyer to pursue a settlement with the other driver's insurance company, but that was dragging on. After working for more than 30 years, she was convinced it would be just a little bit longer before she was healthy and back at her business. Instead, she began falling behind on her payments again.

To stay afloat, Ramos borrowed from friends and relatives, which weighed on her, her friend Shearer says. "She was never one to owe anybody anything before."

Ramos would get occasional calls from Petersen, her mortgage broker. "He was like my best friend," she recalls. "He'd say, 'Hi, Sheila, how are you doing?'" He knew about the car accident and that she was struggling, she says. But when she asked whether she should just put her house up for sale, she recalls, he said there was no need because she could get yet another loan, one that would allow her to pay off her current ones plus give her some money to make the first payments on the new loan. That would tide her over until she got the accident settlement and could work again. "We'll send an appraiser out, and we'll get you this loan," she remembers Petersen saying. "‘You've got plenty of equity, don't worry.'"

The three-bedroom home in Florida that Ramos lost to foreclosure. (Paul Kiel/ProPublica)Less than a year after her first big refinance, her second major loan was much larger: $262,000. Her home, however, had been appraised at $403,000, which, if true, meant that it was gaining about $40,000 in value every year. Seen that way, the loan seemed almost conservative.




As Christmas approached, the money had yet to arrive. On Dec. 19, Ramos overdrew her checking account twice when she made two debit-card purchases — for $9.09 and $7.50 — at a Winn-Dixie supermarket. The two overdraft fees came to $66. The next day, a $37.50 check and a $35.66 charge at Kmart cost her $66 more in overdraft fees. A day later, a $9.95 purchase brought another $33 overdraft fee.

But that day — Dec. 22 — the $65,000 finally landed in her checking account, and it was a new day.

She repaid friends and relatives from whom she'd borrowed thousands. Her bank records show she caught up on her taxes, her cable, internet and utility bills. She got her car fixed. She bought Christmas presents. She took her grandchildren to a resort near Disney World "to give them a treat because they'd been so stressed," she recalls.

Within two months, about $30,000 was gone. Looking back today, she can't remember where it all went: "It seems like a dream."

The Wall Street mortgage machine

Ramos signed the papers for her $262,000 mortgage in December 2006. She didn't know it, but she was riding the last wave of the subprime boom.

Arranged by her local broker, Petersen, the loan was made by a nationwide subprime lender called Mortgage Lenders Network USA. Months earlier, the company, then the nation's 15th-largest subprime lender, had broken ground on a $100 million, 300,000-square-foot headquarters building in Connecticut. But less than two weeks after issuing Ramos' loan, the company stopped funding new ones. It soon furloughed employees. By February 2007, it had declared bankruptcy.

Before it collapsed, Mortgage Lenders Network sold Ramos' loan to Wall Street. The buyer was Merrill Lynch, which bundled it with 6,282 other mortgages totaling $1.4 billion and packaged them into a security, the "Merrill Lynch Mortgage Investors Trust, 2007-MLN1." Investors were invited to buy different classes of the security, arranged from least to most risk. Most of the mortgage loans, like Ramos', had been made to borrowers with poor credit histories. Nevertheless, the credit-rating agencies Moody's and Standard & Poor's gave AAA ratings to the security's safest classes, meaning they were supposedly investments of the "highest quality, with minimal credit risk."

The 326-page offering document does include warnings. On page 17 it says, "In recent months, delinquencies and losses with respect to residential mortgage loans generally have increased and may continue to increase, particularly in the subprime sector." What's more, most of the loans, like Ramos', had adjustable rates that might jump after two years, which could lead to more defaults and foreclosures. Also, a decline in housing prices could make it impossible for borrowers to sell their homes or refinance, trapping them in foreclosure. And most of the loans went to people with poor credit.

It goes on. Many subprime lenders like Mortgage Lenders Network were struggling or failing because their loans were performing so poorly. They were also being accused of fraud, the document says, though it just notes the general trend and doesn't say that Mortgage Lenders Network faced that charge.

Despite those caveats, the document asserted that the loans in the pool had been made according to reliable underwriting guidelines, meaning the borrowers' history, assets and income had been carefully reviewed by Mortgage Lenders Network. "The consumer's ability to pay is of primary importance when evaluating applications," it said. Still, Merrill Lynch could not "provide any assurance that MLN had followed the stated guidelines with respect to the origination of any of the Mortgage Loans."

The security found buyers, including the government-backed mortgage behemoths Fannie Mae and Freddie Mac. In a federal lawsuit filed in September 2011 against Merrill Lynch, the federal agency overseeing Fannie and Freddie claimed the companies were swindled when they purchased the pool that included Ramos' loan (and 87 other securities sold from 2005-07). Merrill has denied wrongdoing.

As in dozens of other cases filed in recent years by investors in subprime securities — often pension funds that were looking for safe, AAA-rated investments — the suit argues that the mortgages were worse than the offering documents represented them to be, leading to large losses.


Then there's the issue of how much money the borrowers were making. While subprime loans were by definition given to people with poor credit histories, those borrowers were supposed to have sufficient income to make their payments. But, the suit charges, many didn't. Lenders and brokers often failed to verify the borrower's income or just made it up.


And they had no long-term stake in the loan: "For brokers, compensation generally came as up-front fees," states the FCIC report. "So the loan's performance mattered little."

Fraud was widespread in the industry.


Petersen's haul was big even for the boom years. Back then, brokers commonly earned about $10,000 for subprime loans the size of Ramos', says Fred Arnold, a director of the National Association of Mortgage Professionals. Rules enacted since the housing crash — particularly by the Federal Reserve — have since restricted how brokers are paid.

Ramos says she clearly explained her situation to Petersen: that she wasn't working because of her injuries and that her family was making do with her mother's Social Security payments and what little other income they could muster. Petersen had the opportunity to verify her meager earnings. The mortgage file, reviewed by ProPublica, includes an authorization form allowing Petersen to examine Ramos' bank statements and tax returns.

Fifteen months later, when she was facing foreclosure, Ramos began to investigate the facts of her loan. She requested her loan documentation from Petersen's office, which provided it. She says she was shocked to find that her loan application listed her income as $6,500 per month.

The application, reviewed by ProPublica, includes other inaccuracies. It lists her as actively self-employed, but her business had fallen apart by that point. It also states that she was not currently delinquent on any mortgage even though Petersen's company, according to the loan file, had reviewed documentation showing that she was.

She called Petersen, she says, and asked why he'd falsified her income. She recalls his answer: "‘Well, you got your loan, didn't you?'"

It was "extraordinarily common" for homeowners who took out mortgages during the boom to be later surprised by what their mortgage brokers had put on their loan applications, says Robert Bridges, a former mortgage loan auditor. His job was to check mortgage files and call homeowners who'd fallen behind on their mortgages to see whether there were any misrepresentations on the loan application. Over the past several years, he's investigated thousands of cases on behalf of mortgage insurance companies that wanted to make sure they didn't pay out on any improperly issued loans. Often, Bridges says, he'd tell a homeowner how much income the loan application said they were making. "They'd go, ‘What? Where'd you get that number? If I made that much money, I wouldn't be in this situation.'"

After Ramos found that her income had been misstated, she complained to everyone she could think of. She sent letters and emails to the FBI, the Florida governor's office and the state's Office of Financial Regulation. "My stated income was falsified and none of the information I gave him was confirmed," said her 2008 letter to the FBI Mortgage Fraud Division. Then, echoing what Bridges said he had heard from so many homeowners, Ramos wrote: "He stated my income at 6,500 per month. If I had this I would not need a loan."

Reached on his cell phone, Petersen declined to comment, saying only that "the company's closed." He has not been charged with a crime.

Neither Mortgage Lenders Network nor any of its executives have been charged with a crime, either. But in an unusual court filing, federal prosecutors have confirmed the company's practices are under investigation. In early 2011, the trustee overseeing the liquidation of the company proposed, as a cost-saving measure, destroying a warehouse full of mortgage files. The Justice Department objected, arguing that the files shouldn't be destroyed until investigators had had a chance to thoroughly review them. The company's "loans are the subject of many ongoing investigations," said the submission to the bankruptcy court. Representatives for the defunct company declined to comment.

The mortgages bundled into "Merrill Lynch Mortgage Investors Trust, 2007-MLN1" have not fared well. As of October 2011, about 40 percent of them had been foreclosed on, as shown in the chart below, taken from investor reports. Another 21 percent of the borrowers are behind on their payments and facing foreclosure.

How Homeowners Are Faring
in the Security that Includes Ramos' Mortgage

Sources: Deutsche Bank trust reports, ProPublica analysis

Moody's and S&P now rate the safest classes of the security — once judged as having "minimal" risk — as having "very high" risk. It's a junk bond.



The mortgage servicing industry

One day in the mail, Ramos received a notice that she had missed a mortgage payment. The notice came from a company she'd never heard of, Wilshire Credit Corp. "I was confused," she says, because she'd sent her payments to her lender, Mortgage Lenders Network. Why was this other company, Wilshire, suddenly asking her for payments?

In a bygone era, the bank that made the loan held onto it and collected the payments. In today's system, that's rare. Instead, the job of actually dealing with homeowners and collecting loan payments falls to mortgage servicers.





Just as Ramos didn't know that Merrill Lynch had bought her loan and then sold it to investors, she also didn't know that Merrill Lynch had selected its own subsidiary, Wilshire, to collect her payments. A small servicer based in Beaverton, Ore., with about 800 employees at the time, Wilshire specialized in handling subprime loans.

In the offering documents for the security that included Ramos' mortgage, Merrill Lynch assured investors that homeowners would be in good hands. Wilshire had ample experience with borrowers who were "experiencing financial difficulties." Their employees were hands-on, prepared for "substantial personal interaction with the obligors to encourage them to make their payments timely, to work with them on missed payments, and to structure individual solutions for delinquent obligors."

Typical for mortgage servicers, those phone calls would come from the company's collections department. At the same time, homeowners would hear via letters and phone calls from Wilshire's "loss mitigation" team, which was charged with deciding whether to foreclose or pursue a "viable workout opportunity." The offering documents give little detail on how foreclosure might be avoided. However, the company said it would be quick in deciding to foreclose if necessary.

Ramos, of course, had taken out the loan because she was "experiencing financial difficulties." The loan had bought her time, but how much? She was still injured and unemployed, leaving next to no income for the household, which was now saddled with a $2,200 monthly mortgage payment. Her checking account went one way: down, month after month. By the middle of 2007, little more than half a year after the $65,000 had landed in her checking account, the money was gone.

Nevertheless, she had hope. She'd taken in an elderly family friend with Parkinson's disease to take care of alongside her mother, and his Social Security payments provided a little additional income. One of her brothers had also moved in after discovering he had leukemia. He agreed to help with the payments while he underwent treatment. She started housecleaning because, even with her weak left arm, she could do that work: She and her teenage granddaughter labored together for the few clients she was able to find. Altogether, she figured, it might be enough to make the mortgage and get by. Her lawyers also had finally launched a suit over the car accident, and she was hopeful they'd win some extra damages beyond paying for her treatments.

But she was continually falling behind and catching up, a pattern that began even before the loan funds had run out. She says she often thought she'd made a timely payment only to find that Wilshire considered it overdue. Late charges and other fees made her climb steeper. The company's employees often called and pressed her to make her payments, but she says no one could clearly explain the reason for certain charges or what she needed to do to catch up.


"Everyone gave me the runaround," Ramos recalls. When she tried to get answers, she often found herself being transferred to this or that person, only to end up leaving a voice-mail message for someone she knew wouldn't call her back.

"You just don't understand how hard she worked at this," says Shearer, her friend, who recalls watching Ramos spend hours on the phone. "Nobody knew anything, and they'd pass you from one person to the next. It just seemed like she never could get the horse by the tail."


A win-win


That was a problem for lenders, for the Wall Street banks that had bought such loans, for the investors who'd purchased securities Wall Street concocted out of these loans, and, of course, for borrowers who were losing their homes, their savings and their creditworthiness. For policymakers, the solution was clear: Get struggling homeowners into affordable loan modifications.

To be sure, modifying a loan by reducing the interest rate, for instance, would mean a loss — or lower profit — for the investor. But if foreclosure was likely to result in even higher losses, then a modification was preferable. Given plummeting home values, a modification would often save the investor money. It seemed like the ultimate win-win.

The earliest governmental program had a modest aim: to make sure the servicer merely considered a modification before pursuing foreclosure. In October 2007, President George W. Bush's administration launched the Hope Now Alliance to provide a forum for servicers and housing counselors to communicate.

"The first step to avoid a foreclosure was for the servicer and borrower to talk to one another," wrote former Treasury official Phillip Swagel in a 2009 narrative of the financial crisis, "but this was not happening in a surprisingly high proportion of instances — some estimates were that half of foreclosures started without contact between borrower and lender or servicer."



Loan modifications were indeed a win-win for everyone — except the servicers. And it was the servicers who were the deciders. They determined whether homeowners like Ramos got loan modifications.

Servicers earn their main revenue through a small fee for handling each loan, usually between .25 and .5 percent of the principal each year, depending on the type. (Riskier loans like Ramos' netted more.) But servicers have another big income stream: penalty fees and foreclosure-related charges.



Ramos shows a breakdown by Wilshire of unpaid charges, including outstanding late fees of $770 and a returned check charge of $50. (Paul Kiel/ProPublica)If Ramos or other troubled homeowners could somehow scrape together the money to pay such fees, great. But the true genius of the business model is that it didn't matter whether borrowers could pay the fees. If a homeowner went bust and the house was sold through foreclosure, no problem. The securitization contracts ensured the servicer was first in line to collect.


David Sambol, chief operating officer for Countrywide, then the country's largest subprime lender and servicer, pitched this idea to stock analysts during a fall 2007 earnings call. His company, he claimed, would benefit from "greater fee income from items like late charges" and the company's "counter-cyclical diversification strategy" of running businesses involved in foreclosing on homes, such as property inspection services. As more and more homeowners ran into trouble and then foreclosure, the servicer could count on more short-term income, not less.


Compared to Countrywide, Wilshire was tiny and hasn't been charged with wrongdoing. But the larger economics were the same: If Ramos kept paying, Wilshire made money. If she lost her home, Wilshire made money.

The one option that didn't make financial sense for servicers was spending money on staff and equipment to make sure that homeowners like Ramos were adequately reviewed for modifications. Trained employees would have to spend valuable time analyzing the borrower's situation and, in effect, re-underwrite the loan. Worrying too much about unnecessary foreclosures would cut into servicers' profits. Servicers also worried that investors might object to cutting homeowners' payments and sue to recoup any supposed losses. No forum for servicers and borrowers to "talk to one another" was going to change the fundamentals of the servicing industry: Collect payments or foreclose.

In the rare event that a homeowner did receive a modification, it didn't typically lower the homeowner's payments, according to a 2008 report by federal banking regulators. About a third of the modifications granted in 2008 actually made the payments go up, because all the servicer had done was lump the arrears and fees into the principal and then amortized the new, higher balance over the life of the loan. About a quarter of the time, the payments stayed the same, and only about 42 percent of the time did they actually go down. As a result, most modifications merely delayed foreclosure. By the end of 2009, according to regulators, more than two-thirds of the homeowners who'd received modifications in 2008 had fallen behind again.


"Dear Valued Customer"



Studies have shown that homeowners working with counselors have fared better than those working on their own (a low bar to clear), but counselors have often complained that they spent a lot of their time just trying to get homeowners' applications acknowledged and reviewed. Delays and lost documents have been the rule.

So it went with Ramos and her counselor: Their major hurdles were logistical — getting someone, anyone from Wilshire on the phone and getting that person to acknowledge receipt of documents that they had sent to the company. Ramos' counselor sent the same documents several times, Ramos remembers. Even though Wilshire was a member of the HOPE Now Alliance, Ramos remembers a Wilshire employee telling her that there was no need to go through a counselor: She could simply contact the company directly — which, of course, she'd had no luck doing.



"I knocked on a lot of doors," Shea said. "I know a lot of folks."

He told them their neighbor was facing foreclosure and needed help getting caught up. One by one, they handed over $50, $100, sometimes several hundred dollars. It wasn't a hard sell, he says. "These people are just willing to help."

Eventually, he delivered about $5,000 to Ramos. Elated, she went with her brother to his credit union to deposit the money and convert it into a cashier's check, she recalls. Wilshire, as do many servicers with delinquent homeowners, required payment with guaranteed funds. They mailed it off, hopeful they'd finally stopped the snowballing growth of her debt, she says. But where those funds went — whether they were deposited and not applied to her mortgage or simply lost — she still doesn't know. How servicers handle payments is often a mystery to homeowners, who often complain that they're lost or misapplied.

On July 12, 2008, Ramos got her first clear response to her efforts to catch up: a summons. "A lawsuit has been filed against you," it said. Wilshire had decided to foreclose.

Ramos' chances for a modification at Wilshire, it turns out, were dismal. In 2009, as part of a report on Wilshire's servicing performance, the credit-rating agency Fitch analyzed how people in Ramos' situation — subprime borrowers who were delinquent in early 2008 — had fared. A year later, only about 12 percent had either caught up on their payments or managed to pay off their loans (mostly through selling or refinancing). The rest — fully 88 percent — had already lost their homes, were in the foreclosure pipeline, or were still behind and likely destined for foreclosure.

Bank of America spokesman Rick Simon, speaking for Wilshire because the bank later acquired the company, says the servicer had reviewed Ramos numerous times for some sort of foreclosure alternative. Back in February or March 2008, there had been "a discussion of setting up a formal six-month payment plan," he says, but Ramos hadn't agreed. Ramos has no memory of such a conversation.

The payment plan was Wilshire's preferred solution to delinquency in 2008, according to a Moody's report, and a favorite industry tool: The servicer simply tacked missed payments and fees onto regular payments. The result, of course, was even higher payments for the struggling borrower.

Three months later, in June, Simon says, Wilshire declined Ramos' application for a modification. The company then reviewed her for another payment plan but rejected that, too. Simon declined to provide the reasons for the denials or evidence that Ramos had been notified. Ramos, for her part, doesn't remember ever hearing about any of this before she was sued.


Dear Valued Customer:

In connection with the above referenced loan, Wilshire Credit Corporation ("Wilshire") has reviewed your request for a MODIFICATION. Please be advised that after careful consideration, Wilshire has declined to approve your request.

Loan Workout

The bailout

It was in 2008 that the full force of the foreclosure crisis hit. Housing prices went into free fall — by year's end, Tampa home prices had tumbled about a third from their peak. Foreclosures skyrocketed, rising about 80 percent from 2007. In September, the investment bank Lehman Brothers went bankrupt, and the beating heart of the financial system seized up.

"I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the crisis, legendary investor Warren Buffett recalled in a 2009 interview with The Wall Street Journal. "I thought, we are really looking into the abyss."

Ramos reviews a court document. (Paul Kiel/ProPublica)Though the crisis had spread far beyond real estate, mortgages like Ramos' — bundled, sold, bundled again, insured and insured against — were the absolute epicenter. Banks and insurance companies carried billions of dollars of mortgage-related assets on their balance sheets, and those assets were plunging in value by the day. Yet, HOPE Now, with its goal of encouraging homeowners and servicers merely to communicate, was still the government's chief effort to stem the damage.

For reformers, the near collapse of the financial system and the ascension of an energetic new president whose party controlled both houses of Congress provided an opportunity to act boldly. Until that point, the idea of using taxpayer dollars to stem foreclosures — supported by some Democrats and economists in the Bush administration's Treasury Department — had been a political nonstarter because of the perception that it would reward irresponsible behavior. But in October, Congress passed legislation creating the $700 billion Troubled Asset Relief Program, more commonly known as TARP or simply "the bailout."

The TARP plan, formulated by Bush's Treasury Department, was for the government to buy up the "troubled assets," mainly those securities backed by mortgages that were defaulting in droves. Democrats agreed but pushed for a clause that would mandate the government to modify the loans contained in the assets it purchased. With the government as the dominant owner of the assets, the thinking went, it would be in a position to dictate how they were handled. After the bill passed, the stage seemed set for the government to rescue not only the country's largest financial institutions but also millions of homeowners.


Obama's options

In the wake of that decision, two broad alternatives emerged.


If the FDIC plan was about dangling carrots, the other option was all stick. Called "cramdown," it relied on bankruptcy courts to force a modification on investors and servicers.

Current law allowed judges to slash credit-card and other kinds of debt (even mortgages on second homes), but the debtor's primary mortgage on a principal residence was off limits. That's why Ramos hadn't declared bankruptcy. She didn't have much debt outside of her mortgage, so at most, declaring bankruptcy might have slightly delayed her foreclosure.


In fact, the carrot of incentives and the stick of forced modifications probably worked best together: The threat of a bankruptcy judge stepping in would provoke servicers to modify loans. "That was always the thought, that judicial modifications would make voluntary modifications work," says North Carolina Rep. Brad Miller, one of several Democrats who were pushing cramdown legislation.

Republicans and the banks vehemently opposed cramdown. "It undermines the foundation of the capitalist economy," says Swagel, the former Bush Treasury official. "What separates us from [Russian leader Vladimir] Putin is not retroactively changing contracts."

Banks, of course, didn't want a third party slashing their loans and potentially costing them billions in lost interest and write-downs. "Every now and again an issue comes along that we believe would so fundamentally undermine the nature of the financial system that we have to take major efforts to oppose, and this is one of them," Floyd Stoner, the head lobbyist for the American Bankers Association, told an industry magazine.

Democrats tried and failed to include cramdown in the TARP legislation, in part because then-presidential candidate Barack Obama, who was leading in the polls and was consulted by Congressional leaders, thought something so controversial might "cloud this thing with partisan politics," as he put it, and imperil the bill's passage.

But cramdown's backers remained optimistic. After all, Obama had campaigned on it and, shortly after rejecting the idea of including it in the TARP, had called it "the right thing to do, to change our bankruptcy laws so that people have a better chance of staying in their homes." He promised Democrats he'd "push hard to get cramdown into the law," Miller recalls.

Cramdown would change the law, requiring an act of Congress. But Sheila Bair's incentives could be enacted unilaterally by the executive branch.

Less than a month into his presidency, Obama announced his new plan. "In the end, all of us are paying a price for this home mortgage crisis," he told a cheering crowd in Mesa, Ariz. "And all of us will pay an even steeper price if we allow this crisis to continue to deepen — a crisis which is unraveling homeownership, the middle class and the American dream itself. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit." The program, he promised, would "enable as many as 3 to 4 million homeowners to modify the terms of their mortgages."

Even as he spoke, Treasury Department officials were still scrambling to work out the details — rules and calculations that would bear enormous consequences for millions of homeowners like Ramos and for the American economy. "We didn't have much on paper at that time," Laurie Maggiano, policy director for the new program, would later say.

In the end, the Home Affordable Modification Program, or HAMP, plucked a few ideas from Bair's carrot approach: For example, servicers would receive $1,000 immediately upon granting a modification to erase their incentive to foreclose and compensate them for evaluating homeowners' ability to afford the modified loan. That incentive was not based on hard evidence. "It was just a guess that $1,000 might be enough," says Karen Dynan, a former senior economist at the Federal Reserve.

But the administration's final plan lacked an incentive Bair considered crucial: having the government bear half the loss of any modification that failed. The administration balked. To have taxpayers eat the losses caused by deadbeat borrowers was seen as political dynamite. A Gallup poll taken in the fall of 2008, for example, had found that 79 percent of Americans cited "people taking on too much debt" as the main cause of the financial crisis. ("Banks making risky loans" was second, at 72 percent.) Instead, Treasury designed the system to pay investors for modifications, but only in increments and only if the borrower continued to make payments. The program only "paid for success," the administration boasted. On average, investors could hope to reap about $15,000 in subsidies over five years.

Bair saw another flaw she considered fatal. "In addition to the lack of economic incentives," she later explained, "the operational complexity was mind-boggling. The big servicers do not pay or train their staff as well as they should. The turnover is very high. That's the reality. You really have to make it simple for the program to be operationally effective."

In her view, the carrot needed to be juicy, sweet and easy to get — because there were no penalties. Servicers didn't have to participate at all; if they volunteered for the program, they signed a contract with the Treasury Department agreeing to follow the rules in return for the incentives.


The day after Obama announced the creation of HAMP to that cheering crowd in Arizona, CNBC commentator Rick Santelli excoriated the program in a rant that is widely credited as sparking the Tea Party movement, which jolted American politics to the right. "How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills?" Santelli thundered. Do Americans, he asked, "really want to subsidize the losers' mortgages"?

Cramdown's proponents saw HAMP as merely a first step. Publicly, the administration still supported cramdown, but its supporters saw worrying signs. The White House "kept punting" when Democrats pushed for cramdown to be attached to larger pieces of legislation such as the stimulus bill, says former Rep. Jim Marshall, a moderate Democrat from Georgia and cramdown backer. In private meetings, Treasury staffers began conversations with congressional aides by saying the administration supported cramdown and would then "follow up with a whole bunch of reasons" why it wasn't a good idea, says an aide to a senior Democratic senator.

The administration feared the consequences for the nation's biggest banks, which had been rescued just months earlier. If too many consumers were lured into bankruptcy, they wouldn't have only their mortgages reduced. They might very well have other debts slashed, such as home-equity loans and credit-card debt. The cumulative effect could devastate the banks, plunging the nation back into a financial crisis.

Cramdown's Democratic supporters needed the president's vigorous support, because the measure faced powerful opponents: not just the too-big-to-fail banks but small banks and credit unions. "The community banks went bonkers on this issue," says former Sen. Chris Dodd, D-Conn., then head of the Senate banking committee. Democratic leaders offered to exempt smaller banks from the legislation but couldn't reach a deal. After narrowly passing the Democrat-controlled House, cramdown was defeated in the Senate when 12 Democrats joined Republicans to vote against it.

Some like Rep. Barney Frank, D-Mass., then head of the powerful House financial services committee, don't blame the White House for the failure of cramdown. But others certainly do. "Their behavior did not well serve the country," says Rep. Zoe Lofgren, D-Calif. It was "extremely disappointing."

When cramdown failed, Bair felt the complicated, weak incentives in HAMP doomed that program to failure: "I think Treasury wanted a press release. I think [Treasury Secretary] Tim Geithner and [then Obama economic advisor] Larry Summers wanted to be able to tell the president that they were doing something on loan mods."

"I got all dressed up"

Ramos' foreclosure made just as little sense to her as Wilshire's actions had. Suddenly, a company named Deutsche Bank was suing her. "This lawsuit that has been filed against me was very shocking since, I do not know who the plaintiffs are, or ever heard of them," she wrote in a handwritten note to the judge. "I have been paying thousands of dollars to another company 'Wilshire Credit Corp' (which never returns my calls, or acts upon paperwork they request from me)."

The full name of the plaintiff was "Deutsche Bank National Trust Company as Trustee for the MLMI Trust Series 2007-MLN1." For Ramos, it might as well have been another language. When Merrill Lynch assembled her