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Executive Summary

Edmund L. Andrews gives us an inside look of his life and adventures that led him through a financial nightmare in his book “Busted: Life Inside the Great Mortgage Meltdown”. Andrews explains his personal encounters of being a homeowner during the housing crisis in 2004 and how easy it was to get “exotic loans” and “subprime” bargains like millions of other Americans (Andrews, 2009).

Andrews was a 48 year old economics reporter for The New York Times that knew all of the ins and outs of Wall Street and all of the curveballs the economy can throw at us (Andrews, 2009). He considered himself as the papers’ chief eyes and ears on the Federal Reserve for six years and followed two well respected and most brilliant successors, Alan Greenspan and Ben S. Bernanke (Andrews, 2009). Andrews wrote numerous articles for The New York Times on the sudden rise in go-go mortgages and covered stories such as the Asian financial crisis of 1997 and the dot-com collapse in 2000 (Andrews, 2009).

After divorcing his wife Julia of 21 years, Andrews was ready to move on with his life.  He was engaged to his fiancée Patty and wanted to rent an apartment or house to blend their families. He didn’t know how he was going to make ends meet, barely bringing home $ 2,700 a month after paying $ 4,000 in alimony and child support to his first wife Julia (Andrews, 2009).  All he knew was that he was in love and willing to do whatever he needed to do to build a better life for him and his soon to be wife Patty. Andrews goes on explaining how he thought he could beat the odds with these exotic new tools of home finance: “exotic loans” (Andrews, 2009). Temptation of a better life and love lured him into borrowing nearly a half-million dollars, which led him into his financial dilemma.

Furthermore, Andrews opens the door to a huge number of lenders and Wall Street deal makers in the housing market that were issuing large amounts of risky mortgages to home buyers knowing they couldn’t afford them. Also how mortgage companies were profiting off of these risky mortgages because of the fact that people couldn’t afford them. He tells us that rating agencies unethically colluded with Wall Street and financial institutions in order to increase revenues at the expense of eager homebuyers (Andrews, 2009). He explains how the U.S. lost about $ 12 trillion in wealth over the past two years because of foreclosures, collapsing home prices, and stock prices due to the wrongdoings of financial lenders and Wall Street (Andrews, 2009).

In conclusion, no one made Andrews or the millions of other Americans who later found themselves in a financial hole sign those risky mortgages papers. But that’s what happens when financial lenders sell customers a dream and perform tricks to make it easy for borrowers to get loans, knowing that they cannot repay them. Andrews being a well-educated financial reporter, is one of the many people who found themselves struggling to make ends meet and trying to save his marriage  while attempting to live the American Dream. He stated that he knew what he was getting into when he signed the documents. By him taking that chance, his story ended with an unhappy marriage, exhausted accounts, and his home being foreclosed. 

The Ten Things Managers Need to Know fromBusted

1.            Managers should plan accordingly, before making final decisions.

2.            Managers should read every contract presented to them thoroughly until completely understood before signing it.

3.            Managers need to take everything into consideration, such as risks and employees, before taking on a task.

4.            Always act ethically, no matter what the situation is.

5.            Treat others as you would want to be treated.

6.            Take pride and responsibility for your actions, even if you are in the wrong and made a mistake.

7.            Don’t make decisions based on just personal interests or huge profits, think about others too.

8.            Emotional decisions are not always smart decisions, they can lead to failure.

9.            Managers should be able and willing to adapt to the ever changing economy.

10.            Everyone makes mistakes, but it’s not the end of the world.

Full Summary of Busted

Money for Nothing

            It was December 2007and Andrews, now 52 years old, was covering the biggest financial calamity since the Great Depression (Andrews, 2009). During this time the housing market was plunging and Wall Street finally realized that millions of people who had purchased homes with “liar loans” had actually lied to get their loans. Also, delinquency and home foreclosure rates were soaring several times higher than financial experts had predicted (Andrews, 2009). The housing market was falling apart and Americans started to panic. Andrews, being a well-educated economic reporter for The New York Times wanted to take a chance on starting a new life with his fiancée Patty. Andrews didn’t have a lot of money to work with because he was paying $ 4,000 in alimony and child support to his first wife Julia (Andrews, 2009). He was in love and he knew that his fiancée Patty, which was a long-time friend, was moving from Los Angeles to Washington to be with him and they needed space for their blended family.

So like many other Americans, Andrews signed a risky mortgage with American Home Mortgage Corporation. Since his credit scores were almost perfect, Andrews was pre-approved for $ 500,000 which he accepted. Bob was a mortgage loan officer for American Home Mortgage Corporation who was known to specialize in “unusual situations” (Andrews, 2009). He worked with Andrews and performed tricks to help him get a “no-ratio” mortgage, which meant they would only verify his assets and not his debt-to income ratio (Andrews, 2009).  American Home Mortgage Corporation and other mortgage companies were willing to look past borrowers financial problems in returns for a higher interest rate. Andrews took everything into consideration and knew in his gut that he couldn’t afford the payments. But Bob, the loan officer reassured him with these words, “Don’t worry; the value of your house will be higher in five years. You will be able to refinance” (Andrews, 2009).

Prudence is for Losers

            While consumer spending was getting out of control, unemployment was increasing and the prices of owning a home were rising faster than people were earning annually. There was a boom in home equity loans and lines of credit, to where people were treating their homes like ATM machines (Andrews, 2009). Many economists were warning about the housing bubble that was being caused by home market prices, consumer incomes, and the rough balance between assets and liabilities, but many ignored the signs. Andrews was aware that the housing market was unstable but he still wanted to pursue his dream knowing in his heart he couldn’t afford it. During that time, American homes were overpriced and the housing market was over inflated. Demands for homes were increasing faster than they could be supplied. Andrews ended up paying 37% more for their home because the pressures were intense to buy a home rather than rent an apartment. Since many Americans were purchasing overpriced homes with exotic loans and new go-go mortgages, it pushed them further and further into debt, which led to many homes being foreclosed. Andrews wasn’t so lucky, being as educated as he is, he became another statistic. Like Dean Baker said in 2003, “home ownership, far from being the American Dream, might well be the fast path to poverty” (Andrews, 2009).

My Lender Drinks Kool-Aid

            Andrews thought of himself as a high roller, being able to acquire a half-million dollars in as little as 4 hours. He describes the feeling of buying their home as “vaguely exciting, edgy, and a little gangsta” (Andrews, 2009). Andrews couldn’t understand who in their right mind would lend millions of Americans more than 3 times as much than their annual salary, including him. The man behind the scenes was Michael J. Strauss. He was the founder and chief executive of American Home Mortgage (Andrews, 2009). Strauss had started his company from his Manhattan apartment in 1988, which soon became the second-fastest growing company in the United States (Andrews, 2009). Andrews describes Strauss as being a high risk taker, full of greed and deception, contributing to the housing bubble by luring people into dream homes they couldn’t afford. Basically targeting consumers with bad credit, low incomes, and who had never owned a home which were mostly African Americans, Latinos, and other minorities (Andrews, 2009).

Strauss used techniques such as catchy phrases and low interest rates which was almost fabrication. Andrews also explained how Strauss built his clientele by shifting towards more risky loans like ALT-A loans and “Choice” mortgages in 2005, which Andrews fell victim of (Andrews, 2009). Strauss knew exactly what he was doing and he knew that people were looking at homes as investments rather than a place to live, so he was there to help in an ironic way. With so many borrowers looking to make huge profits from flipping houses not paying attention to all of the dangerous risks involved, Strauss was becoming happier and richer. He stated in 2005 that his statement of “high yield” meant risky borrowers bring higher profits and “supplemental insurance” meant he could lay the risk off on someone else (Andrews, 2009). That showed how much he cared, he was making money. But you can’t blame him for everyone being greedy. He was just doing his job-helping people buy homes while increasing America’s debt.

Magical Thinking, Real Debts

            Reality hit Andrews in January of 2005, after his ATM receipt revealed they were broke. It was four months since they purchased their new home with the “no-ratio” loan. They had $ 12,000 to help with their start-up expenses, from Andrews selling his shares of company stock (Andrews, 2009). The money didn’t last very long, being that Christmas was around the corner. During this time, his fiancée Patty wasn’t earning enough money for them to make ends meet. Andrews “magical fantasy” was in hopes that his fiancée would become a well, ambitious go-getter in the current job market (Andrews, 2009). But that didn’t work out too well since her last job was in 1980. They didn’t know what to do realizing that they were $ 15,000 in credit card debt (Andrews, 2009). Tension rose between Andrews and Patty to the point where Patty was afraid to be near him sometimes. To make matters worse, Andrews came up with a riskier plan-borrow money from his 401(k). He states “Why not?”(Andrews, 2009).

Alan Greenspan

            It was October 2008 and the economy was at its worst with banks and Wall Street firms failing and the Bush Treasury Department getting bailed out every time you turn around. Andrews reintroduces Alan Greenspan and his personal views about what contributed to the destruction of the economy and the housing bubble. Alan Greenspan was the chairman of the Federal Reserve (Andrews, 2009). Greenspan admits that he was shocked on how Wall Street promoted risky loans and how banks made it easy and didn’t care, which in time wrecked the financial system. But ironically, Greenspan was mostly responsible for the financial meltdown.

            According to Andrews, Greenspan seemed to like debt. He even agreed with Joseph Schumpeter’s view of capitalism as “creative destruction” (Andrews, 2009). He believed that a dynamic economy, such as ours, wouldn’t be possible if people didn’t have the freedom to take risks and make mistakes. Greenspan felt that the economy should self-destruct or bubble and then later on,  wait to clean it up to prevent from causing anymore harm. But for the most part, there was a Fed governor who was appointed by President Clinton who actually tried to look out for the well being of consumers. His name was Edward M. Gramlich (Andrews, 2009). For years he had been warning that the sudden rise in subprime loans was bad for the economy. Gramlich was a man who spent most of his career trying to find ways to prevent poverty and protect low-income borrowers from greedy lenders.

Conning the Con Men

            Two years had gone by since Andrews and Patty bought their home and finances were still low. Andrews didn’t feel like a “high roller” anymore, in fact he states that him and Patty were testing their limits when they got married and wrecked their car. The amount of liar’s loans and exotic mortgages continued to grow to the point where it seemed as if it was never going to end. Andrews explains how the competition for lenders to find new borrowers increased uncontrollably. Lenders were so desperate that they were practically giving money away. They were offering low-doc loans to people that had just come out of bankruptcy, no-down payment deals for people who wouldn’t document their incomes, and serial mortgages to condo buyers who used their equity from one property as a down payment for another (Andrews, 2009).  He states how easy it was for people to borrow more money against their home with no money, high credit card debt, and a low credit score.

            Still drowning in $ 50,000 of debt, Patty ended up wrecking their vehicle 6 hours before their wedding. That brought on more stress for the couple. Andrews told Bob, his mortgage broker, about his financial problems. Bob was a free spirited type of person who didn’t judge people. He believed that financial problems were a natural way of life. Andrews was in search of some type of financial help from Bob, even though he no longer worked for American Home Mortgage. Bob tells Andrews that his idea of borrowing money from his 401(k) was a bad idea. Bob came up with a plan to get Andrews to borrow against the equity of his home to pay off his credit cards to boost his credit scores. Then after, he can refinance his home with a cheaper loan. But even though it seemed as if their worries were over with this new idea, their money problems and spending habits were still causing tension between them.

In Search of the Smart Money

            With the housing bubble at its peak, competition for new loans grew fiercer than ever. Lenders were still lowering their standards making it even easier to gain new borrowers. Andrews knew that Fremont Investment & Loan weren’t going to lose any money if his new loan of almost a half-million dollars had defaulted. He explains how lenders and other mortgage companies sell their risky mortgages to Wall Street firms almost immediately after borrowers sealed the deal. By doing this lenders are handing over the responsibility to the investors who purchase them. Wall Street then transforms the subprime loans, like the one Andrews has, into securities with the same triple-A ratings as US Treasuries (Andrews, 2009). Ironically, transforming subprime mortgages into securities with triple-A ratings were so popular that investors had $ 1 trillion worth of these loans (Andrews, 2009).

            It was told that giving loans to troubled borrowers was just a “layering of risks” that needed to be controlled or stopped. Foreclosure rates were on the rise, and followed by that was prevailing interest rates. During this time credit-default swaps became just as popular as the risky mortgages borrowers were getting. A credit-default swap was a form of insurance that if a loan defaults the investors would still receive the full amount that’s owed to them (Andrews, 2009). Furthermore, delinquency and default rates were rising higher than predicted with the amount of subprime mortgages they had floating around. Everyone from Wall Street down to investors thought they were safe from risk, but they soon realized they weren’t.

Over the Cliff

            By mid 2006, delinquency and foreclosure rates on subprime loans had risen higher than normal which forced lenders to start pulling back. Fremont Investment & Loan, Andrews’s lender had made an announcement stating that they would stop loaning to people with credit scores below 600. Andrews and Patty were lucky that they refinanced their home three weeks prior to the announcement, buying themselves some “breathing room” (Andrews, 2009). Tension between them started to go away and they began to feel comfortable around each other again. But that ended shortly when Patty was fired in October of 2006.

            They had to come up with a new plan to survive their financial dilemma, even if Andrews had to lower himself to ask his mother for money. Patty didn’t like the idea of borrowing money, but something had to be done and fast. Andrews borrowed $ 15,000 from his $ 60,000 inheritance, which his mother controlled. Even though the $ 15,000 was a huge plus in their pockets, tension continued to escalate between them. Andrews grew angrier with Patty’s lack of drive in her job search. Patty looked at Andrews as if he was a “monster” and felt like she would have been better off alone. But this was just the beginning of their marriage going downhill.

Enablers of Disaster

            Subprime mortgages began to ruin the whole financial system on July 10, 2007 (Andrews, 2009). Two most powerful rating agencies, Moody’s Investor’s Service and Standard & Poor’s took responsibility and admitted they had messed up by rating a huge number of risky loans. Both had downgraded hundreds of bundled securities that were backed by junk subprime mortgages. The lending of subprime and Alt-A mortgages soon ended when the money ran out. With the financial system at its worst there wasn’t any money left to lend to borrowers.

When these two major companies started downgrading subprime mortgages, a ripple affect occurred. Many lenders started to lose money from defaulted loans and some even filed for bankruptcy. These rating agencies contributed so much to the financial collapse with their risky rating approaches that they earned excellent profits from the subprime boom. Their nonchalant ways brought down some of Wall Street and a huge chunk of the economy.

Bull in the Subprime Shop

            In this chapter Andrews introduces Bill Dallas, one of the go-go lenders in southern California. Dallas became victim of reckless lending even though he was one that was warning people of reckless lending. He followed all of the rules unlike his competitors, insisting that borrowers provided pay stubs, bank statements, and tax returns. It was better being safe than sorry.  But Dallas soon jumped on the bandwagon with the rest of risky lenders not because he wanted to but because of all the pressure to gain new borrowers.

Andrews tells us that investors cared more about mortgages that paid higher interest rates rather than credit quality. Nor did they care if the borrowers had excellent credit scores and documented their income and assets. The market was out to make profits and preferred “sleaze over safety” (Andrews, 2009). This shifted the market in the worst way ever.

Public Flailing, Private Failing

It was now August 2007 and the mortgage crisis on Wall Street was the most important topic on Washington’s political agenda. With the economy at its worst, the housing market plummeting and foreclosure rising uncontrollably, White House officials and the Federal Reserve couldn’t turn away from this. They had to come up with a plan to fix the situation before it had gotten any worse. It was going to be a slow recovery with all of the events that had taken place prior to the bubble.

            Congress and the Bush Administration began to battle over how to help troubled homeowners that were facing foreclosure. They needed to get the economy to bounce back from this financial meltdown. Washington didn’t realize how much time and money it would take to get America back the way it used to be. They were truly unprepared for the crisis they were facing.

Reverse Redlining

            In this chapter Andrews reveals how a large number of minority families were tricked and trapped into risky mortgages. Many were drawn in by affordable prices for homes that they were advised by their broker they could afford. Minorities were the main targets of subprime lending because they either never owned a home or didn’t make enough money and wanted to live the “American Dream” of being a homeowner.  They contributed a lot to the growing number of subprime and Alt-A mortgages.

God Help Us All

            Four years had passed since they purchased their home and now Christmas was just a few days away. They were still broke and at each other’s throats over money issues. They had fallen thirty days behind on their mortgage and now Chase wanted to foreclose on their home.  At this time the economy was still down and most of Wall Street had crashed. By the looks of it, Andrews and Patty weren’t the only family facing foreclosure; about 4 million homeowners were going to lose their homes in 2009. On top of that 2.6 million jobs were lost and it was roughly stated that it was going to take more than $ 700 billion to help bail out the financial system (Andrews, 2009).

            Andrews felt some kind of relief, but not much when President Obama announced his $ 75 billion program for people facing foreclosure (Andrews, 2009). He states that their misadventure had certainly been more extreme than other Americans, but it was not at all unusual. He tells us that he was lucky enough to still have his pension plan, unlike many others. This led him to think that he had something to fall back on. And even though stress had brought a lot of strain between the once happy couple, love was never lost between the two.

The Video Lounge

http://www.colbertnation.com/the-colbert-report-videos/238785/july-16-2009/edmund-andrews

The clip shows an interview of Edmund Andrews explaining how he had fallen victim of the mortgage crisis.

Personal Insights

Why I think:

With business conditions today, what the author wrote is – or is no longer true – because:

At the time when Andrews was writing this book, Wall Street and lenders were out to make large profits and the rules were being stretched to its limits. The lenders in the financial industry were acting in an unethical way which caused the financial industry to suffer the way that it did. Now, the rules and regulations are stricter and the lending practices have become better, to where they are out to help people and not hurt them in the long run. 

Then, all of the following bullet-items are mandatory to write about:

If I were the author of the book, I would have done these three things differently:

1.            I would have included a little bit more about some of the people that were mentioned in the book and how they overcame their financial crisis.   

2.            I would have included how his wife Patty fixed her financial issues and how both of their children that were in college, could afford to attend school being that both parents were broke and in debt. 

3.            If I were the author, I wouldn’t have left the audience hanging and trying to figure out what happened and if their financial problem was ever fixed. 

Reading this book made me think differently about the topic in these ways:

1.            It wasn’t really the borrowers fault, but mostly the lenders with their scandalous lending practices and lies.

2.            I understand how Wall Street and most investors think now and how they contributed a lot to the housing bubble and the downfall of our economy. 

3.            I know now that whenever I attempt to purchase a home, I should be extra cautious just in case, so that I wouldn’t fall victim like millions of other Americans.

I’ll apply what I’ve learned in this book in my career by:

1.            Never jumping into a situation before evaluating it for some time.

2.            Being extra cautious, because you can’t trust everybody and everything is not as good as it seems.

3.            Thinking positive about risky situations, it keeps the stress level down. 

Here is a sampling of what others have said about the book and its author:

“What others have said about the book and its author?”

            Some of the reviews on Amazon.com believed that Andrews did a great job providing important information about the mortgage crisis and what contributed to the bubble. Some reviewers wrote that Busted is a book that every member of Congress and people facing foreclosure should read. Tom Vanderbilt from The New York Times Book Review stated that Andrews’s autopsy of the mortgage crisis was “mordantly funny”.

            A lot of other people weren’t so nice about their reviews. Compleat Reader said the book was stupid and shallow. Basically stating that everyone involved were idiots and that they knew what they were getting themselves into. Also a review from D. Jankowski stated that the book was a “waste of money”. Jankowski posted that throughout the book Andrews had a “not-my-fault” attitude about everything.

Bibliography

Andrews. Edmund L. 2009. Busted: Life Inside the Great Mortgage Meltdown. New                        York, New York. W.W. Norton &Company Inc.  

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Contact Info: To contact the author of this “Summary and Review of Busted,” please email w0291448@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/).                

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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 $ 500,000 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 $ 12,000 cushion from the selling of his stock and now his bank receipt read $ 196. 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 $ 600 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 $ 15,000 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/).