The Chop Shop

I once read about a thief who broke into Paris MOMA. You know those guys usually get caught, and when they do, it’s after being holed up for three weeks in a coal cellar littered with Brioche Doree wrappers, a bin filled with their own waste, discarded cans of Carlsberg, and, of course, $120 million worth of Picasso. I remember thinking: What an asshole. And as far as I knew back then, that was the end of the story. But thinking about it now, that guy was probably just a low-level canvas-plucking pawn in a much bigger game. Somewhere in the tall hills of Montenegro was a slovenly art dealer with clients too rich to imagine. He was the real crook.

The mortgage racket is no different. The real crooks in this business are the chairmen and CEOs like Lee Farkas (he of the quote: If I owe you $100, I’ve got a problem. If I owe you $1 million dollars, you’ve got a problem.). But for those who feel victimized by the financial massacre, the bad guy, the moron in the basement left holding nothing but his manhood and a resume that reads Don’t Hire Me, is the lowly mortgage broker. He is the one at the pillory, the Lieutenant William Calley of this particular massacre. No doubt, there are many brokers who are decent people with clean hands. But there are plenty that deserve the reputation that precedes them, and those people always used to be found in the same sort of place: the chop shop. Upton Sinclair would’ve feasted on these places. When I got into the business, I spent eighteen months working in one.

All chop shops have the same basic business plan:

1. Find a steady supply of warm bodies. After the great dot com employee purge of 2000 and 2001, there was an endless stream of people who needed to pay for their Kenneth Cole habits and used BMWs. This was the next boom. Easy work with high reward. It was one of the few financial sales jobs you could get without any sort of government licensing or background check.

2. Secure a company name geared to make people think you are a legitimate financial institution. Borrow a solid brand name and tweak it. Chase Bancorp would have been a solid choice.

3. The bait. Send out direct mail fliers that reference the homeowner’s current lender that make them think they are being contacted regarding some sort of urgent communication.

4. The switch. Give them the bad news (credit history, high rate, etc.; there are countless examples, and we’ll delve into this another time). Berate them until they understand that they are completely screwed and surely to miss out on the plummeting rates. Then the deliver the good news: You’re here to help them get out of their jam.

5. The burn. Sell them the highest rate or the riskiest program or the biggest up-front junk fees you can without them walking away.

6. The churn. This is during a time when the rates went from the low 7s (2001) to the 4s (2009 and beyond). On a loan amount of $250,000, if you lower your rate by a quarter point, it’ll save you roughly $50 each month. For a lot of people, that’s decent money, considering it’s more than $18,000 over the life of the loan. If someone can convince you of this once, chances are they can convince you of this again. And again. And again. They could have refinanced you 10 times. Each time your payment would have gone down. Each time the broker could have made anywhere from $1,000 to $5,000. Maybe this would come out of your equity. Maybe out of your pocket. But the worst of this was for those in the most pitiful shape of all. For those whose credit sucked and were about to lose their home, they would have done anything to save it. Even pay upward of $10,000-15,000 for one refinance. This would come out of the equity in their home—an equity created by the bogus inflation of a bubble market. In time, when the values came down, they’d just owe that money to someone else when the lender came knocking again. And they always did, because some people were just meant to be tenants.

The people who owned these places didn’t need to be smart. Predators seldom are. They just have huge balls. The chop shop that I worked for had two owners. They came to disagree on a number of things, so they split up the company. The newly created company was run by a guy named Todd. On top of committing gross amounts of fraud, Todd also found time for a side business. When the FBI busted through the front door of his business suite to arrest him for a real estate scheme, he grabbed the most valuable possession within reach and fled out the back door. I’m sure it made sense to him at the time. His house was on fire, so to speak. When he ran into the clutches of an FBI agent stationed at the back door, a cloud of white dust billowed into the air and settled on the two men’s faces. In Todd’s arms was a plastic bucket filled with 328 grams of cocaine.

What an asshole.