Sex, Lies, and Subprime Mortgages

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asp?symbol=BSC'>BSC), and Lehman Brothers, sold mortgage-backed securities worth $1.5 trillion, up from $245 billion in 2000. To keep the supply of loans coming, the investment banks increasingly took control of the industry's frontline players as well. First they started buying small, independent wholesaling firms. Next they extended billions in credit to subprime lenders. Then they took stakes in some, and bought others outright. At the height of the frenzy in 2006, six top investment banks shelled out a total of $2.2 billion to buy subprime shops.

That gave Wall Street the power to demand more subprime loans, which carried the highest interest rates and were the most profitable. As a national account director for Deutsche Bank (DB), Mark D. Toomey bought loans from mortgage lenders to turn into securities. Sometimes, he says, he "twisted arms" to get more loans. "Nobody had the [guts] to say no," says Toomey, who left the bank in 2007. Deutsche Bank declined to comment.

But mostly, brokers and wholesalers were happy to comply. The more loans they made, after all, the more they got paid. One former wholesaler in Northern California who requested anonymity joined subprime lender GreenPoint Mortgage in 1997, right out of college. By 2004, she says, she was pulling in several hundred thousand dollars a year. She kept a chauffeur on call to shuttle her and her friends to "exclusive clubs, restaurants, and parties," and treated friends to shopping sprees at Neiman Marcus, Gucci, and Louis Vuitton. "It was the time of our lives," says the woman, who now works as an account executive for another lender in the area.

Brokers say some female wholesalers weren't up on the finer points of finance—but exploited other assets in their quest for more loans. "You had boiler rooms of younger, predominantly male brokerage operations and in would walk a gorgeous, fit [wholesaler] who would go desk to desk," says Rick Arvielo, president of New American Funding, a mortgage brokerage in Irvine, Calif. "Most of them didn't know the product."

Of course, it's accepted practice in many industries for companies to hire attractive saleswomen. What's more, on Wall Street, lurid tales of erotic dancers livening up after-hours events are common.

"INDECENT PROPOSALS"

But in the mortgage business, it went further: The women allegedly offering sexual favors were bank employees. Evan Stone, president of Walnut Creek (Calif.) mortgage brokerage Pacific Union Financial, says "minimally trained and minimally dressed" wholesalers often wooed brokers. He says he regularly got visits in his suburban office from representatives wearing unusually short skirts to entice him and his team of brokers to party at the local Ruth's Chris Steak House. Stone says one New Century wholesaler offered to fly him to Chicago to "have a good time." He says he declined all offers of sexual favors. "There were some indecent proposals made," he says. "That was part of building the relationship."

Wholesalers also offered sexual favors to co-workers. To drive up their commissions, some enticed loan underwriters at their companies to approve questionable applications. A vice-president at Washington Mutual who once wielded $500 million to make loans recalls an incident in which a female wholesaler wanted him to approve a loan that didn't fit guidelines. The manager, who requested anonymity, says the co-worker, wearing a low-cut shirt, knelt down at his desk and said: "I really need this. What do I have to do?"

Some wholesalers turned a blind eye to broker fraud, too. "I'd walk into mortgage shops and see brokers openly cutting and pasting income documents and pay stubs, getting out the Wite-Out and changing Social Security numbers," says Melissa Hernandez, a former wholesaler for Argent Mortgage, a unit of now-defunct Ameriquest Mortgage, who says she never knowingly bought bogus applications. "There was no ambiguity."

Other wholesalers took matters into their own hands, doctoring documents to qualify borrowers for loans.