Last week in Cleveland, nine former employees of a former subprime lender named Argent Mortgage Co. were indicted for their roles in making nearly $13 million of fraudulent residential mortgage loans. The Cuyahoga County Mortgage Fraud Task Force, which brought the charges (it operates under authority from the Ohio attorney general) alleged, among other things, that managers at Argent coached brokers on how to falsify loan documents—say, by lying about the borrower's income—so that the borrower would appear to meet the company's standards. Cuyahoga County Prosecutor Bill Mason said that this was the first time in Ohio, and one of the few instances nationwide, that a mortgage fraud investigation led to criminal charges against the employees of a subprime lender. (Other cases have involved independent operators.)
In a way, this is great news: At least some of those who are to blame for the crime spree that was subprime lending are paying the price. But it's also an example of what's wrong with the fallout from the financial crisis. Those who are paying the price are the smallest of the small fry, while those who benefitted the most remain untouched. And in the case of Argent, it'll stay that way.
You may not have heard of Argent, and there's a reason for that. Argent's founder was a man named Roland Arnall, and Roland Arnall always stayed in the shadows. But he was the father of subprime lending. Within the industry, Argent was very well-known indeed.
Back in the late 1980s, Arnall founded a thrift called Long Beach Mortgage, which was at the vanguard of making mortgages to people with less than pristine credit. By the end of the 1990s, Long Beach had been sold to Washington Mutual, and many of the people who worked there had gone on to help build other major players on the subprime lending scene, such as New Century. After the sale of Long Beach, Arnall founded another lender called Ameriquest, which by 2004 was the nation's largest subprime lender. ("Proud sponsor of the American dream" was the company's tag line.) Argent was a lesser-known division of Arnall's empire. Unlike Ameriquest, whose loan officers made mortgages directly, Argent was a so-called "wholesale" lender, meaning that it bought loans from mortgage brokers. (By 2001, 50 percent of mortgages were being made through independent brokers, who sold to wholesalers like Argent.) But Arnall's name was never on the door of any of his companies, and none of them sold shares to the public. You never read about Roland Arnall in a glossy magazine; he was very private.
Early on, Argent began pushing subprime loans in Cleveland. Indeed, a lawsuit filed by the city of Cleveland in 2008 against a number of subprime lenders and Wall Street firms alleged that Argent accounted for more than one-quarter of all the subprime loans made in Cleveland from 2002 to 2006. (The lawsuit was later dismissed.) "When Argent showed up, they immediately jumped out because of the volume of their activity," Tom Bier, a housing expert at Cleveland State University, who has been analyzing county records for 25 years, told me. "They went after the weakest fish." According to Bier's analysis, by April 2007, 25 percent of the loans that Argent made in Cleveland had resulted in foreclosures. So it was that Cleveland, where home prices never rose high enough to mask the problems with the mortgages, became a bellwether of the problems to come.
Within the industry, Arnall's companies developed a reputation for the hard sell, and for making any loan at any price. As in most of the industry, everyone was compensated based on loan volume, so in the branches, all that mattered was selling as many loans as possible, by any means necessary. "Push, push, push," one former loan officer told me. Managers were brutal to those who weren't closing loans, and it was an open secret that there were ways to get around the company's supposed controls.