Is Wall Street At Fault For Mortgage Meltdown?

DATE July 8, 2008 ACCOUNT NUMBER N/A
TIME 12:00 Noon-1:00 PM AUDIENCE N/A
NETWORK NPR
PROGRAM Fresh Air

Interview: Financial reporter Paul Muolo discusses the home
mortgage crisis
TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

Remember when buying a home seemed like a great investment, and when you were
confident that the value of your home would keep going up? Well, Wall Street
and the mortgage industry were confident of that, too, and that confidence led
to practices that backfired and helped create the subprime mortgage crisis, a
crisis that has damaged the American economy and infected the global economy.
My guest, Paul Muolo, is the co-author of the new book "Chain of Blame." It
explains the role of mortgage lenders and Wall Street in creating the subprime
crisis. Muolo is the executive editor of National Mortgage News. A little
later we'll talk about the latest developments with the government-chartered
mortgage investments companies Fannie Mae and Freddie Mac.

Paul Muolo, welcome to FRESH AIR.

Although subprime mortgages have kind of killed the economy, initially the
mortgage lenders and the banks who invested in them thought that they'd make
money. Now since subprime mortgages were loans for people who had bad credit
or didn't have adequate income to qualify for a regular loan, how did everyone
think they'd make money on such risky loans?

Mr. PAUL MUOLO: Well, Wall Street operated under the premise that the value
of houses would keep going up 20 percent a year in hot markets. They believed
that they could package these loans into bonds and charge, you know, 2 points
higher than say the people who had very good credit, package them into bonds,
sell them overseas and to domestic investors, and that if something went wrong
they would get bailed out because, lo and behold, within a year or two that
house would have gone up 20-40 percent.

GROSS: So the banks and the loan companies thought, `Well, even if somebody
defaults on the loan, then the mortgage company gets the house.'

Mr. MUOLO: Right.

GROSS: The house had risen in value so they made a profit right there.

Mr. MUOLO: Well, yeah. So it was a big investment in this belief there was
no gravity to housing prices and Wall Street really didn't care a whole lot,
from what we investigated, on the quality of the loans that they were
investing in and buying.

GROSS: So let's start with the subprime loans. What are the other things
that made these loans risky?

Mr. MUOLO: Well, there were different kinds of subprime. I mean,
traditionally subprime loans were made to people in the 1960s and '70s who had
a lot of equity in their houses and needed to take equity out for an emergency
or car or something or other. In this new breed, this new strain, shall we
say, of subprime, the loans were made to people who didn't have down payments.
That was a big one. People who were what we call stated income borrowers,
which means you walk into a mortgage company office and you say your income is
100,000, and they believe you.

GROSS: There's no investigation to see do you really earn 100,000?

Mr. MUOLO: There was very little--they did credit checks. They did a credit
check. They did something called a FICO score, which a lot of consumers are
probably familiar with that phrase. They did a credit check and a
computerized score on what their credit was, and as long as that checked out
OK and someone said they made 100,000 a year they believed them; and again,
they believed them because, you know, home prices would keep going up. So
that was one of the biggest loans that sunk the economy.

GROSS: So you're saying they believed them because they felt they had nothing
to lose?

Mr. MUOLO: They had nothing to lose. I mean, yeah. The Wall Street firm
that securitized these bonds and sold them to another investor, most of them
didn't really--they didn't--you know, they funded the loans to some degree,
but they didn't hold onto them. They just passed it on to another investor.

GROSS: So let's talk about what it means that these subprime loans were
securitized, that they were, you know, bundled and made into bonds that people
can invest in. Would you explain what that means, how it's done?

Mr. MUOLO: Well, basically the loan is originated by a nonbank mortgage
lender, sometimes a bank.

GROSS: What's an example of a nonbank mortgage lender?

Mr. MUOLO: Oh, well, someone like Ameriquest Mortgage, a big California
lender that originated subprime loans to the general public. They didn't take
deposits from the public, they just made loans and resold them. They were
what we call a nonbank mortgage company. Then Wall Street would buy those
loans and package them into a bond. They would take a lot of loans--it's not
just one or two loans. They would take thousands upon thousands of loans,
pool them into a big security and sell that security to another investor.
Towards the end of the crisis, Wall Street really couldn't find too many
investors because the quality of these bonds and loans became into question,
they had invested themselves which is where some of these big losses have come
over the last six months.

GROSS: Wait, let me stop you there. Let me stop you there.

Mr. MUOLO: Yeah.

GROSS: So the Wall Street companies took the subprime loans, packaged them
into bonds, and sold the bonds to investors. So how does the investor make
money on these securitized mortgages?

Mr. MUOLO: Well, investors are always looking for yield, and they believe
that their bond will not go bad. So they're looking for a good investment.
And the safest investment out there is US Treasury bonds; and if the Treasury
bond yield them say 4 or 5 percent and they can buy a subprime bond that
yields 7 percent, 2 percent more than the Treasury bond and they think it's a
safe investment, that's what the investor is looking for.

GROSS: So because the people who funded their homes with subprime mortgages
were credit risks, they were charged a higher interest rate...

Mr. MUOLO: Right. It's all about...

GROSS: Right? Because they were risky.

Mr. MUOLO: Yeah. Right.

GROSS: And therefore, once these high interest subprime loans were packaged
into bonds, those bonds were supposed to yield a higher interest rate...

Mr. MUOLO: Exactly.

GROSS: ...too.

Mr. MUOLO: For the company that was investing...

GROSS: Right.

Mr. MUOLO: ...in them, yes. That was the whole point. It's all about
yield.

GROSS: That all sounds great unless the people can't pay their loans, which
is what happened.

Mr. MUOLO: Oh. That's true. And that's what happened in the end.

GROSS: Yeah.

Mr. MUOLO: Now some of these loans were current for a year or two and some
were what we call adjustable rate loans, and they had a fixed rate for say two
or three years and the consumer felt OK; but lo and behold, in the beginning
of 2007, late 2006, those loans start adjusting upwards and that's where we
saw a lot of the damage, where people couldn't pay those higher rates because
the economy began to sour.

GROSS: Now a lot of the money that was made in the whole subprime era was
made on commissions. Who made the commissions and where on the chain did they
make them?

Mr. MUOLO: Well, you know, there were commissions--and the entire chain of
originations, I mean, the modern era of mortgage lending isn't like the old
Bailey Building & Loan days where, you know, Jimmy Stewart made the loan as
George Bailey and kept it at his institution and sent out the payment coupon
book. Here you have loan brokers on the front end. They get a commission for
making the loan. That loan gets sold to another investor. Well, the
wholesaler funds the loan from the broker. The wholesaler, Countrywide, for
example, or Ameriquest Mortgage, they get the loan from the loan broker.
They've paid that broker money, a commission for bringing it in. Then they
sell that loan to Wall Street and they make money off the deal as well. Then
Wall Street takes those loans, packages them into bonds, and they sell it to
an investor, say a German bank, and they make a commission on that bond sale.
So you have commissions, you know, every step of the way: at the broker
level, at the wholesaler Countrywide level, and the bond salesmen at Merrill
Lynch. So you have it all through the chain, commissions all the way around.
And then finally that bond or those mortgages rest with the end investor, and
they could choose to keep that bond for the long term or sell it to someone
else. If they sell it to someone else, there'll be another commission.

GROSS: Wow, by the time everybody's done making their commission, what's left
for the investor at the end of the chain to make?

Mr. MUOLO: Well, that's a good question. Well, usually they try and hang
onto these bonds as long as they can, because as long as they're performing
and the interest rate or the yield is on them is pretty good, they feel safe
with those bonds. But before they even get to that point, there's a lot of
commissions in that chain.

GROSS: Now you describe almost sweatshop conditions in the loan approval
sections...

Mr. MUOLO: Right. In the Bear Sterns...

GROSS: ...of the mortgage company.

Mr. MUOLO: ...chapter of the book, yeah.

GROSS: Yeah. Explain what you mean by that.

Mr. MUOLO: Well, what we discovered, and I guess it was pretty obvious to us
because we've been on the beat for--Matt and I had been on the mortgage beat
for a while. You have the A paper mortgage is a good mortgage that everyone
likes to make. And then you have the nonprime sector. You know, from what we
discovered, you know, Wall Street stepped in here and really tried to take
over this entire business of lending to people with bad credit. And they did
this by creating such a system where loans would be originated by loan
brokers. They would be funded by wholesale mortgage bankers like Countryside
and Ameriquest, New Century and others. And then Wall Street would take those
loans and they would securitize them into bonds, as we talked about. And they
created a system where they didn't really have a whole lot of full-time
employees involved in this process, Wall Street, that is. So to look at these
mortgages that they were buying, Wall Street used outsourcing firms
called--the Clayton Group was one, the Bohan Group was another. And they
basically set up what we deem sweatshops. They would put all these workers
into a big hotel room with laptops--we called them "laptop grunts." And they
basically had an edict to approve one loan an hour. It was basically
described to us as sort of sweatshop conditions, but some of these people were
paid pretty good money. The laptop grunts we describe in the book, they had
to basically approve one loan an hour, or they felt they had to approve one
loan an hour. And it was all about getting as many loans through the system
as possible, because the quicker they got the rubber stamp, the quicker the
Wall Street firm--Bear, Merrill, Lehman Brothers--could securitize these loans
into bonds. It was all about creating almost a--it was almost like a factory,
so to speak, where the loan moves from origination to underwriting review into
securitization.

So they set up these huge contract underwriting deals with Clayton Group and
Bohan, and they shoved a lot of people into a big hotel conference room and
they said, `Here's the loan packages. Look at them real quick and approve
them.' And there was a lot of pressure to approve these loans. We were told
in some cases some of the contract underwriters of people looking at the loans
would sort of be persuaded to maybe change the ratings so the loans and get
approved. The idea is not to slow the factory down, get as much through the
system as possible.

GROSS: So it was all about quantity. It was about getting as many loans as
possible as opposed to making sure the loans were made to people who might be
able to pay them back.

Mr. MUOLO: Yeah, it was quantity over quality. And again, the fallback
would always be the rationalization for this system is that home prices would
keep going up. You don't have to worry so much about it. Just approve the
loan. It was a crazy idea when you think about it. But again, Wall Street
didn't--it's funny though, because Wall Street did not want to own their own
mortgage companies at first. They didn't want to have all these employees,
you know, because they got to pay them, they're all full-timers, they got to
pay benefits. They wanted to avoid that model.

Then after a while, Wall Street decided to start buying their own subprime
companies to lend loans. They wanted to secure the factory flow of product
through the system, the flow of loans through the system so they could have
guaranteed flow of product that they could securitize. So after a while they
felt safe owning their own lending companies and Merrill Lynch bought one of
the biggest subprime lenders out there.

And they, but again, they didn't want to own retail branches. They didn't
want to be in a community, you know, making loans at the street level. All
the firms that Wall Street bought to lend loans, to get those loans
securitized, they were all what we call wholesalers. They all used loan
brokers. They didn't want a whole apparatus of employees that they had to put
on their balance sheet, had to pay benefits for. They set out to create a
machine that employed as few people as possible, few full-timers as possible.
They wanted this perfect system that could shrink and grow; because the
mortgage market is very cyclical, it booms and busts. They wanted that kind
of system. They didn't want all these employees to worry about. So after a
while they started buying their own subprime lenders. Merrill Lynch, again,
bought First Franklin. Bear Sterns owned a couple. Lehman Brothers had their
own subprime firms.

So that was the idea, to create what they felt was a better mousetrap. And in
the end, this mousetrap, you know, didn't work.

GROSS: You've explained a system in which every step of the way, somebody or
some firm is making a pretty large commission. Give us a sense of like what
was at stake there, the size of the commissions that brokerage houses or
individual loan officers would make.

Mr. MUOLO: Well, we did a lot of research for the book, and we came away
with the biggest commission seems to be on the loan broker level. The money
that the loan broker would get from the wholesaler lender, the Countrywide,
the Argent, the New Century. It's all about points. I mean, the riskier the
loan, the more points the broker gets. So the yield on the loans, if they
bring in a loan with a lot of...

GROSS: Points are like percentage points?

Mr. MUOLO: Yeah. How many percentage points they would get. Brokers seem
to make a lot of money and we came across some examples where, you know, loan
brokers--during the peak, from 2004 to 2006, some loan brokers wouldn't even
bother with deals until they could make $10,000 in fees and percentage points
on that loan. So there was a lot of that. The brokers made a lot on the
front end. I mean, some brokers were making a half a million dollars a year.
We heard stories about brokers making a million dollars a year; and these are
people, some people who didn't have a whole lot of experience in the mortgage
industry. And the biggest commissions were on the subprime loans.

GROSS: If you're just joining us, my guest is Paul Muolo. He's the co-author
of the new book "Chain of Blame: How Wall Street Caused the Mortgage and
Credit Crisis." He's the executive editor of the National Mortgage News.

Second mortgages played a big role in the whole mortgage meltdown, and a
second mortgage is when you basically take out a loan against your own home.
Would you explain how that works?

Mr. MUOLO: Yeah. Usually you have a first mortgage, your existing mortgage,
usually the larger mortgage. The second mortgage is just an additional
borrowing against that house. In this crisis, though, you had in some cases
you had people taking out both a first and a second when they bought a house.
And there's a reason they did that. And the reason is that they wanted to
avoid this thing called private mortgage insurance, and the way that
translates is if you don't have a big down payment, usually 10 or 20
percent--I think it's 20 percent--that you had to go out and get this policy
called private mortgage insurance where you would pay a mortgage insurance
company 80, 90 bucks a month, whatever it might be, because you didn't have a
big down payment.

In this case, Wall Street and many big lenders came across the idea, you make
the borrower two mortgages when they buy the house. The second mortgage
serves as the down payment. So you might have a 90 percent first mortgage for
90 percent of the value of the house. And simultaneously, if you have no down
payment, you take out a second mortgage for 10 percent, and that serves as
your down payment. And this way you don't have to pay that nasty old private
insurance mortgage policy. You have two mortgages on your house but you don't
have to pay that monthly, and the beauty of that here is you can deduct the
interest for tax purposes on both loans. Private mortgage insurance up until
recently was not tax deductible. That's since changed. So it was just a way
to get someone in the house by doing this fancy borrowing through a second
mortgage.

GROSS: And getting yourself really deep into debt.

Mr. MUOLO: Yeah. And that was the other thing here. I mean, in this
crisis, a lot of the trouble that was caused was these no down payment
mortgages. In the old days when subprime lending--was never really big, by
the way. It never really--subprime lending didn't explode until Wall Street
got their claws, you know, firmly into this business. In the old days,
subprime lending, people with bad credit needed money and they would get it
but it was not a big business; and when those loans were underwritten, the
subprime loans in the '60s, '70s, and even '80s, those loans were, you know,
they used to carefully scrutinize the borrowers, the lenders did. In this
new, you know, easy credit world, their credit was not looked at very
carefully.

GROSS: Now you say that places like the Money Store and Beneficial Finance
had loan officers pounding the pavement in search of credit-impaired customers
who needed to borrow against the value of their homes and take out second
mortgages.

Mr. MUOLO: Mm-hmm.

GROSS: How did that work?

Mr. MUOLO: Well, back in the--they did a lot of advertising back then.
People who lived in the New York-New Jersey area would see Phil Rizzuto, for
the Money Store, during the Yankee game and on late-night TV, on WPIX. As a
kid I used to see those commercials. You know, Phil Rizzuto, this icon of
baseball, you know, pitching, you know, `Do you need money? Do you have a
house? We can get you a second mortgage.' That's how the business was in the
'60s and the '70s and even the '80s; where, you know, these legitimate
companies were out there originating second mortgages to people who had a lot
of equity. They had a home that was worth, say, $200,000. They'd bought it
years earlier and they only bought it for say, you know, maybe 100,000. So
they had this big cushion and they needed money and they couldn't get it from
their normal bank or savings and loan because their credit was blemished. So
they would see these commercials on TV or the radio or in the newspaper and
they would, you know, call up, and they would get a second mortgage; but they
would be looked at very carefully in the old days. That's what--they were
much more careful in the old days--Beneficial and Household, and the Money
Store--looking at the credit of people because, you know, we didn't have this
whole Wall Street apparatus back in the '60s and '70s.

Basically companies like Beneficial and the Money Store, they would make this
second mortgage and they'd hold onto it. And if it went bad, they'd go after
the customer. And you know, sometimes they went after them a bit
aggressively, but that's how the business was. And the defaults, by the way,
back them were not very steep at all, not like today. Default rates could be
very, very low, under, you know, 2-3 percent. You know, today Countrywide,
right before it got bought by Bank of America, they had a delinquency rate of
33 percent on their subprime mortgages. I mean that's just, you know,
phenomenal, unheard of. That's, you know, insane. That never happened. That
would never happen in the old days.

GROSS: So how and when did Wall Street become involved in packaging these
subprime loans, securitizing them, turning them into bonds and selling them to
investors?

Mr. MUOLO: Wall Street, well, Wall Street's been in the securitization
business since the 1980s; but basically, you know, Wall Street was in this
business of securitizing these good quality mortgages, A-paper loans, and they
were fine. They were for years. Still are. Then Wall Street in the 1990s
got involved in securitizing subprime loans; and other companies on Wall
Street, Prudential Securities Group, for one, found that, again, they could
lend money to these nonbanks, buy their loans and securitize them, and the
business actually was pretty good in the 1990s. It wasn't a big business at
all, but it was a safe business because back then even the companies operating
in the late 1990s were somewhat careful about the loans they were making.
They didn't make these crazy low down payment or no down payment loans. No
one every really tried it until--probably Prudential was one of the first, but
Wall Street just found another thing to securitize. I mean, they love
securitizing cash flow, whether it's a credit card or subprime loan. That's
what Wall Street does.

GROSS: Now you've been covering the mortgage industry for more than two
decades.

Mr. MUOLO: Mm-hmm.

GROSS: Did you see the mortgage meltdown coming? Could you tell something
was going to happen before everybody else knew about it?

Mr. MUOLO: I knew was something was going to happen. It just--when I
realized, probably back in 2006, you know, I had seen it coming a couple
months before. The craziest loan I ever saw was this thing called a payment
option ARM; and for the listeners out there, it's basically the mortgage where
you say, `Hey, we're going to give you an adjustable rate mortgage and each
month you've got four options. One is to pay off principle and interest, one
is to pay off interest, one is sort of to do nothing. The other is called
negative amortization, and that means keep your payment really low and we'll
just add onto the debt you owe us.' So that's the craziest loan I ever saw in
20 years of covering mortgages.

GROSS: Why is that so crazy?

Mr. MUOLO: Well, people used to, you know, want to own a home and pay it off
as quickly as possible, not add onto the debt. And when I saw these payment
option ARMs taking off, it just to me was, you know, `What is this?' Now a lot
of lenders were involved in that loan. Countrywide was one of them.
Washington Mutual, World Savings, which eventually got bought by Wachovia. I
mean, you're selling the American dream without, you know, the consumer really
getting involved in any kind of sacrifice here.

If they can make the lowest monthly payment month after month, 90 percent of
them probably will. And they keep thinking, well, eventually they know they
have to eventually pay off these new debt that they're piling up at the end;
but they take on this mental attitude of, `I'll cry tomorrow. I'll worry
about it tomorrow. I want to keep my payment low. You know, I got soccer
bills for my kid's soccer league. I got the car payment. I want to go on
vacation. I want to go to Vegas.' You know, the consumer rationalizes not
making the normal payment, so they do this negative amortization payment where
they're adding onto the debt. When I saw that loan taking off, I thought,
`This is bad.' Plus, I just, you know, being in the business, seeing home
prices going up 20 percent a year, that doesn't last for too long. You know,
it lasts in selected markets for a year or two and then cools off. Here this
20 percent a year going up each year in hot markets, like California, New
York, New Jersey, I'd never seen that going like that so consistently without
the population booming, and the population in this country wasn't booming.
But something was fueling it and what we learned, we discovered was that these
payment option ARMs were helping consumers bid up the price of housing because
they could keep that payment real low. And if you have a bunch of people with
that ability to keep payments low and get into the housing market, it's, you
know, supply and demand. And that's what drove up the prices so quickly in a
lot of these markets, these crazy payment options ARMs which loan brokers sold
to consumers and Countrywide would buy them, or other companies would buy them
from the brokers. So that was the crazy loan.

But when I saw this thing coming, I didn't think it was going to be this bad.
And I didn't really realize until maybe a year ago it was going to be really
ugly, but I didn't think it was going to be quite this bad. I knew it was
going to be bad, but this is something else.

GROSS: This is interesting. You're saying that the price of homes was
inflated in part because people could kind of get away with paying their
mortgage without paying their mortgage?

Mr. MUOLO: Exactly.

GROSS: Just by putting it off and putting it off, getting deeper and deeper
into debt.

Mr. MUOLO: Exactly.

GROSS: Instead of getting out of debt and paying off their mortgage. And
because people were deceived into thinking that they could kind of get an
expensive home without having to pay much in the immediate future, they were
willing to buy it.

Mr. MUOLO: Oh, without a doubt. At least that's something I believed in for
a year or two now that the payment option ARM, the, you know, sort of a
subprime loan in a way but not really, that was the loan--what came first, the
chicken or the egg? And you know, high housing prices, or did this loan come
about and cause high housing prices? I think this loan, this payment option
ARM, came along and helped excel home prices in some markets into the
stratosphere. That's just something I believe in doing all the research for
the book, it's just that this loan created a huge demand, a huge ability of
people to buy homes that they probably shouldn't have afforded or could never
have afforded if it wasn't for this one little option where they didn't have
to pay the full mortgage amount and could actually add onto their debt and
keep their payment really low. That's what I think really drove home prices
into the stratosphere.

GROSS: If you want to buy a house now, do you need a good credit rating? Is
it going to be harder to get, like, a subprime mortgage now?

Mr. MUOLO: Oh, without a doubt. Subprime mortgages are near nonexistent.
Just to give you an example, the peak of the industry was 2005, I believe.
Something like $800 billion worth of subprime loans were originated in 2005.
The next year about 700 billion. That's a phenomenal amount of money. In the
first quarter of 2008, $5 billion in subprime loans were originated. Business
has basically been wiped off the face of the earth. There's not much of a
subprime business out there. It's all gravitating now towards what we call
the FHA program, the Federal Housing Administration. People with bad credit
who have trouble getting a down payment are now using these government-insured
loans. So people feel that maybe the FHA, the government could be in to get
walloped down the road if these new loans being originated and insured by the
government come under pressure. But the subprime industry we've know from
2000 to 2007 is basically just about over. I mean people with bad credit
don't have a place to get loans.

GROSS: There were front page headlines this morning about Fannie Mae and
Freddie Mac shares losing a lot of money yesterday. So before we talk about
what that means and how the story's been updated, could you just tell us what
Fannie Mae and Freddie Mac are?

Mr. MUOLO: Fannie Mae and Freddie Mac are two publicly traded companies that
have government charters. Their mission in life is to provide liquidity to
the mortgage market; and the way they do that is that they buy mortgages from
banks, savings and loans, and nonbank mortgage lenders, credit unions, and
they buy those loans for cash, or they swap in securities, and that cash gets
given to the financial institution, the bank or the S&L, and they take that
money and go out and make more loans. That's their mission. That's been
their charter for many, many years, and they--right now they are the backbone
of the mortgage industry in the wake of the collapse of the subprime industry.

GROSS: So do Fannie Mae and Freddie Mac basically have a lot of the subprime
mortgages that are the problem children? Do they own a lot of those mortgages
now?

Mr. MUOLO: They don't own a lot of them. There's roughly a trillion dollars
in outstanding subprime loans in the US. Together Fannie and Freddie own--and
my numbers are not quite--these are estimates--somewhere in the neighborhood
of 140 billion in bonds that are created from subprime loans, and they have
triple-A ratings, meaning there's insurance on those bonds. So they feel,
even with all these defaults, they're going to get paid off. Probably a lot
of what they own is guaranteed. So they don't--they own maybe 10 to 15
percent of the outstanding. It's not a huge number, but there is concern
given all the credit quality concerns about subprime delinquencies.

GROSS: So what was the problem yesterday behind the plummet in Fannie Mae and
Freddie Mac stock prices?

Mr. MUOLO: Well, it wasn't directly related to the subprime crisis per say.
An analyst from Lehman Brothers came out and said, `If this new accounting
change from FASBE'--that's the accounting body, I won't explain what FASBE
stands for. But this account body said, `We think Fannie and Freddie should
hold, or post, more capital against these securities they've guaranteed, that
are held by investors, big institutional investors, not held on their balance
sheet, that they have their guarantees on these securities and they probably
need to hold more capital against them. That's what FASBE said. It's a rule
that affects many institutions, not just Fannie and Freddie. And one analyst
at Leyman Brothers said, `Well, if this rule becomes law and Fannie and
Freddie have to adhere to this rule, they might have to raise $75 billion in
new capital.' And when that report came out and hit the stock market
yesterday, their shares tanked. So that was the issue.

GROSS: And what's the update today?

Mr. MUOLO: Well, the update today is I interviewed the head of OFHEO, the
government agency, Office of Federally Enterprise Oversight. James Lockhart.
I got to talk to him briefly this morning, and he isn't all that concerned. I
think deep down he thinks Fannie and Freddie will get a waiver on this and
that the securities that they guarantee--it doesn't change the risk of the
securities. A lot of the securities that are off their balance sheet, that
they have the guarantee on, are A-paper rated securities. And he also
reminded me that Fannie and Freddie already have capital set aside to cover
these securities. So he feels that--I think he's in touch with FASBE, the
agency is, and I think this rule will not--is not going to apply to Fannie and
Freddie in the long run. It's going to apply to other financial institutions.
Because right now, in the wake of the subprime crisis, Fannie and Freddie are
the key provider of liquidity to the banks and S&Ls that need liquidity and
that need someone to buy their loans, and Fannie and Freddie right now are the
only game in town.

GROSS: So Fannie Mae and Freddie Mac have to function?

Mr. MUOLO: Oh yeah. If something happens to Fannie and Freddie, ball game
is over in the US economy. They are the backbone of the US mortgage market.
If something happens to them--they get nicked or go out of business, or the
government--worse comes to worse, the government would nationalize and make
them pure federal agencies, but I don't think it's going to get that ugly and
go that far. But if something happens to Fannie and Freddie, meaning they
cease to function, no one's going to buy houses. The housing market will shut
down. The mortgage market will be decimated, and it could usher in the Great
Depression that people keep thinking is just around the corner. But I think
the government and everyone in the government, the White House and Congress,
realize the stakes on this issue; and I think cooler heads are going to
prevail and that whatever this accounting rule is, Fannie and Freddie won't
have to adhere to it.

GROSS: Fannie Mae and Freddie Mac, the mortgages that they buy from banks and
nonbanks, Fannie Mae and Freddie Mac gets those mortgages insured but they're
insured by private companies. And those private companies are in a great deal
of trouble, too, aren't they?

Mr. MUOLO: Well, you have two types of insurance here. Fannie and Freddie,
when they buy loans that have low down payments, they require mortgage
insurance policies to be put on those loans. And there's quite a few of
those. There's seven of those companies, one of which is just about to go out
of business. So you have the mortgage insurance companies. They have
insurance on loans that Fannie and Freddie buy that have low down payments.
And then you have the insurance companies, FDIC, EMBC, and NBIA. They put
insurance on the triple-A rated subprime bonds that Fannie Mae and Freddie Mac
have bought in the marketplace. Fannie Mae and Freddie Mac have these huge
balance sheets. They invest in all sorts of mortgages including their own
mortgages, obviously. But they've gone out there and they've bought triple-A
rated subprime bonds. And the ratings on those, the insurance on those
triple-A bonds come from the three companies I just mentioned: NBIA, FDIC and
EMBC. And those companies have been under extreme, extreme financial pressure
during the subprime crisis because they decided to get into the subprime
business a couple of years ago and write insurance polices to cover defaulted
bonds, thinking `Well, these bonds will probably be OK. We don't' have to
worry about paying a lot of claims on them.' But lo and behold, these bonds
are not OK and now they're paying a lot of claims on them, and putting them
under financial stress.

GROSS: So that sounds kind of scary like the backup system is in jeopardy?

Mr. MUOLO: It is scary. But again, I think cooler heads are going to
prevail on this, and this report that came out yesterday from Lehman Brothers,
I think, today, their stock prices are coming back a bit. So I think there's
a belief that, again, things will be worked out. They won't have to post
all--and raise all this extra capital, which would be very tough in today's
market.

GROSS: So in other words, things are going to work out with Fannie Mae and
Freddie Mac because there's no choice. They have to work out or else we're
all in trouble?

Mr. MUOLO: Or else. No, yeah. That's the ugly bottom line. They will make
it work out.

GROSS: Paul Muolo, thank you so much for talking with us.

Mr. MUOLO: Thank you.

GROSS: Paul Muolo is the co-author of the new book "Chain of Blame: How Wall
Street Caused the Mortgage and Credit Crisis." He's the executive editor of
the National Mortgage News.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

Interview: Stephanie Shain discusses the mortgage crisis and pets
TERRY GROSS, host:

The mortgage crisis has forced many people to give up homes they could no
longer afford. Among the many victims of the mortgage crisis are pets, who
have been left homeless after their owners were forced out by foreclosures.
My guest Stephanie Shain is the Humane Society of the United States director
of outreach for companion animals. She directs programs that promote adoption
and responsible pet keeping, and also directs the Pet for Life program that
helps to keep pets and their people together. The Humane Society has been
posting advice on its Web site for those caught in the economic downturn who
are unable to afford to keep or take care of their pets. Shain recently
adopted two dogs who were given up as a result of the financial crisis.

Stephanie Shain, welcome to FRESH AIR.

So what are the signs that some pets are being abandoned as a result of the
mortgage crisis?

Ms. STEPHANIE SHAIN: We started to get concerned at the Humane Society of
the United States nationally about four, five months ago when we heard an
increase in foreclosures. And we know, from our history working with animal
shelters in the country, that animals are sometimes abandoned by people who
are forced to move, whether it's out of a foreclosed property or simply just
out of an apartment. Our effort was trying to prevent this from happening, to
get the word out to people that if you are facing a situation that does not
allow you to take your animal with you, and if you are not able to find a new
home for that animal, to please bring them to an animal shelter rather than
leave them in the home that you're leaving.

Far too often animals who are left abandoned in homes are not discovered until
it's too late, until they've died, or they're in such a state of distressed
health that once they are discovered they're not able to be saved. So our
original concern really was trying to prevent this kind of suffering, to reach
out to folks and get them to do the responsible thing for their animal if they
weren't able to keep them.

What we've seen over the past five to six months is that the situation is much
more dire for animals and it extends well beyond the foreclosure issue. It
really is something that is touching people who are affected by the economic
downtown. So people who may not be losing their homes but whose budgets are
suddenly much more tight than they were six months, nine months ago, and the
animals unfortunately are bearing the brunt of that tightening.

GROSS: You know, I know some people really believe that it's better for the
pet not to take them to a shelter because they might be killed at the shelter
if they're not quickly adopted, and some people think it's just like more
liberating for the animal to like leave them in the old home that they're
abandoning, you know, that the owner's abandoning, or to take them to a large
park and, you know, quote, "set them free there"...

Ms. SHAIN: Mm-hmm.

GROSS: ...rather than take them to a shelter where they might be put to
death. What do you think of that logic?

Ms. SHAIN: Well, I think, you know, you can empathize certainly with people
who, for whatever reason, aren't able to keep their animal and are afraid to
have them euthanized. However, I think it really is a situation of putting
themselves in that animal's position. It's tragic any time an animal is
euthanized in the shelter. Absolutely. But it is far better if that animal
is going to die to do so humanely at a shelter than to starve to death in a
home where that animal's last days will be absolutely panic-filled. When we
find an animal who's been abandoned in a home or in an apartment, you can tell
the signs of that dwelling show this animal's panic. You can see attempts to
escape, whether it's scratching on the door or around windows. Animals have
been found with wallboard or carpeting in their stomach, that they're starving
and are trying to eat something. So it's a real tragic, scary end for that
animal.

Likewise, when they're, quote, as you mentioned, "set free," that people have
this thought that somehow they can sort of revert back to being wild creatures
or that someone might find them and take care of them. And certainly there
are good Samaritans out there who would do what they can or would call their
local animal control agency to help an animal who was a stray in a park or
wherever. But it's a very risky situation to put an animal in.

It's horrible to see a dog who has been hit by a car, or a cat who has been
attacked by a wild animal or a dog who's allowed off leash. So again, it's a
very risky thing to let that animal go and hope that things turn out better.

And we--obviously you can--if people are concerned about having their animal
go to a shelter, they can take steps to try and find a home for that animal
themselves. We offer tips on our Web site, humansociety.org, for finding a
responsible home for your pet; but we absolutely recommend that if you can't
do that, the local animal shelter is the best place to take your pet because
they will do their best to try to find a new home for that animal.

GROSS: Do you...

Ms. SHAIN: And some people could find themselves, if they have a purebred
animal, that they may be able to work with breed rescue, which usually has a
foster home network, so that would be an option for them as well.

GROSS: Are animal shelters filling up in areas that have been particularly
hard hit by the mortgage crisis?

Ms. SHAIN: We are hearing from shelters in different parts of the country
that they are seeing an increase both in the number of animals coming through
their doors, being relinquished by people, as well as the requests from
families who are seeking assistance. So someone who is really trying hard to
keep that animal with the family, but may need assistance like free pet food
or assistance with veterinary care.

GROSS: How much of a backstory do shelters usually have on the animals that
are brought to them? Do shelters know when an animal is being brought there
because the owner's home has been foreclosed on?

Ms. SHAIN: Oh, it's a great question. Different shelters handle
categorizing animals differently, but most shelters are going to find out some
basic information about those animals. Certainly why the animal is being
brought in. So if it's for a foreclosure specifically, it may just--they may
have more general information that it's for a financial reason, or that the
family is simply moving. And your question raises another really good point
for people who are giving up their animals, and that is, when you take your
animal to a shelter, you can provide really valuable information that helps
the shelter find that animal the best home. So letting the shelter know what
your animal's history has been, what his or her living conditions are like, if
they're used to being with cats or children or things like that. It helps the
shelter find the best home for that animal, so it's another reason to bring
your animal to a shelter.

GROSS: Now you've actually rescued a couple of dogs yourself whose owners
gave them up because the owners' homes were foreclosed on. Tell us the story
behind the two dogs you recently adopted?

Ms. SHAIN: Sure. We adopted Panda about a little over a year ago, and he
was brought in. He was one of three dogs. He's a large dog, about 70 pounds,
and he was brought in with two other dogs to our local animal shelter here in
Washington, DC. And his family had to move. They were losing their home, had
to move into an apartment and couldn't take these three big dogs with them.
We added him to our home, and he has been, you know, just a fantastic dog. We
knew--the shelter was able to tell us that he had lived with children. And he
was a very great, mellow, easy-going dog; but we have small children in our
home so it was helpful to know that he had been around kids and was very
comfortable with children.

Then about six months later, we were looking at the Web site of our local
animal shelter and my daughter noticed that his sister, who we had seen when
he adopted him, had been returned to the shelter; and unbelievably the family
who adopted her found themselves in an unexpected financial crisis and
returned her to the shelter because they had to move into a smaller apartment
that did not allow a dog of her size. Again, she's a large dog, as well, so
we added her to our family. So she lost two homes because of housing
situations that people couldn't bring the dogs with them.

GROSS: Was the second dog you adopted more distrustful or more skeptical that
you'd be giving him a permanent home because he'd been given up twice?

Ms. SHAIN: She was definitely more wary, I think. You know, it took her
longer to calm down. It's hard to say why, you know, she was like that, if
that was just how she was or if it was because she'd been through so many
homes. You know, she had been in her home and then at the shelter, and they
had placed her in foster care, then she was adopted, then back at the shelter,
then back in foster care. So she had been through a lot in a very short
amount of time. You know, in only in about six months she had been in a lot
of different situations, so she was a little bit more wary and it took her
longer to relax. But within a couple of months she was, you know, she knows
she owns the place now and so she's great, and it was great to be able to
reunite she and her brother. But certainly, you know, you can put dogs
together that don't have histories together and they can be the best of
friends as well.

GROSS: Do you think your two dogs know that they're siblings?

Ms. SHAIN: I think they know that they knew each other. I don't know if
they--if they recognize as sort of a family member, if they know they're
siblings but I believe they definitely recognized each other. When we first
brought her over to our house to meet him, he was thrilled. He was absolutely
thrilled to see her and, you know, they took a quick sniff of each other and
went right into running around the yard.

GROSS: And just one more thing. If you want to help people who are having
trouble with their pets or help shelters who are supporting a lot of pets now,
what are some of the things you can do?

Ms. SHAIN: A couple of things you can do. Number one, contact your local
animal shelter. See if they have specific needs that can help them. It's not
always a financial donation that they're in need of. There are lots of other
ways you can help your local shelter, whether that's volunteering at the
shelter or collecting donations for them in the form of blankets or food.
And, you know, I think a great thing that happens when you help animals is
that it doesn't just help the animals, it helps people as well. You know, we
talk to people. Every single day, people are calling our offices at the
Humane Society of the United States and whether they're in a financial crisis,
whether they are facing a significant illness, whether they need to move
suddenly for whatever reason and can't take their pet with them, you know, the
welfare of their individual companion animal is of the utmost importance to
them. They may not be able to fulfill that commitment. They may not be able
to keep that animal any longer, but it's so important to them that they insure
a safe future for that pet. So, absolutely, by helping animals we help people
because we love them. People love them and, you know, we see this time and
again, whether it's a natural disaster that comes up or, again, just a
personal crisis, our companion animals are our family and it's very important
to people to make sure that they're provided for.

GROSS: Stephanie Shain, thank you so much for talking with us.

Ms. SHAIN: Thank you.

GROSS: Stephanie Shain is the Humane Society of the United States director of
outreach for companion animals.
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