The Lender and the Louisville Slugger

Written By Brian Hicks

Posted May 10, 2007

Now that New Century Financial has finally crashed and burned like the Hindenburg, the gory details of its fatal business practices have begun to make their way into the light of day. And it’s about what you would expect.

Greed, loose underwriting, and a business model that spun wildly out of control all contributed to the morass that led to the sub-prime mortgage giant’s freefall.

But of all of the unsavory tales that have been uncovered by the press, one story in particular seems to sum up New Century’s demise all in one little neat package.

It’s a story about a salesman and his baseball bat.

It involves an honest New Century appraiser named Maggie Hardiman, and it ran earlier this week in the Washington Post.

According to the story, New Century Financial allowed itself to be pulled deeper into the pit than could ever be imagined. Employees were physically intimidated into approving loans that they knew were bad from the start.

You can read the full story here, but let me give you a few excerpts. They are shocking, to say the least. The story was written by David Cho and it starts off like this:

"Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks with a baseball bat as they walked through her office. Bang! Bang!

"‘You cut my [expletive] deal!’ "she recalls one man yelling at her. "‘You can’t do that.’ "Bang! The bat whacked the top of her desk. As an appraiser for a company called New Century Financial, Hardiman was supposed to weed out bad mortgage applications. Most of the mortgage applications Hardiman reviewed had problems, she said.

But "you didn’t want to turn away a loan because all hell would break loose," she recounted in interviews. When she did, her bosses often overruled her and found another appraiser to sign off on it.

"The stress in that place was ungodly. It was like selling your soul," said Hardiman, who worked for New Century in 2004 and 2005. "There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals."

"We were constantly told, ‘If you look the other way and let an additional three to four loans in a day that would mean millions more in revenue for New Century over the course of the week,’" Hardiman said. She added that it seemed "no one, from the top levels down to the lower levels of the office, didn’t want those loans to go through."

Kind of scary, huh? It’s certainly not the type of atmosphere that you would expect in the offices of a major lender. A third-world sweat shop maybe, but definitely not what you look to find in the white collar world of mortgage finance.

I bring this story up for two reasons. One, because it’s so surreal, and two because it perfectly describes the daily atmosphere in an industry that simply ran amok.

Ms. Hardiman, by the way, was fired for her refusal to go along with it. Her refusal to meet her "quota" apparently sealed her fate. The truth, it seems, was not something to be discovered but something to be swept under the rug.

Not surprisingly, New Century officials were quick to dispute her story. A senior executive who spoke on condition of anonymity claimed that while the atmosphere within its branches was sometimes tense, the firm had safeguards to make sure that its workers were not unduly pressured.

It’s worth noting, however, that the company didn’t even bother to stoop to the "disgruntled former employee" defense. That may be because numerous other former employees have corroborated Ms. Hardiman’s stories about the pressure-filled environment.

Baseball bats may indeed have been the exception, but the pressure to "go along to get along" was certainly the order of the day within the offices of the troubled lender.


The story drives home the point of just how easy and loose those loan approvals became in the rush to close more deals and deliver the kinds of numbers that Wall Street looked kindly upon.

But more than that, it also demonstrates the fraud, speculation, and easy money that drove the housing bubble in the first place. And the truth is that none of it ever could have happened without a bevy of lenders like New Century that were willing to bend the rules to pad their bottom lines.

That is, until it all came crashing down a couple of months ago under the weight of those very same truths that Ms.Hardiman was trying to expose. Unfortunately, stories like hers are just the tip of the iceberg.

So if you still believe that a rebound in real estate is just around the corner, you may want to rethink that.

That’s because those loose lending practices employed by New Century and others like them created what is commonly know as an underlying condition. It’s the factor that gives birth to all resulting circumstances–in this case the dramatic run-up in home prices. Without it, in other words, the bubble cannot be maintained.

But now that the fatal flaws of that underlying condition have been exposed, the days of easy money have abruptly ended, sinking housing even further. The market is finally returning to some kind of sanity.

The scary part is that the lenders knew it all along and did nothing to stop it.

A comment by Bank of America chief executive officer Ken Lewis in Bloomberg yesterday just about sums it up. He noted that the so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.

"We are close to a time when we’ll look back and say we did some stupid things," Lewis said. "We need a little more sanity in a period in which everyone feels invincible and thinks this is different."

His comments echoed the opinion of Wells Fargo chief executive officer Richard Kovacevich, who said in December that "I am not a forecaster of the future; I’m a historian. And history says this will blow up. It always has. And there will be some blood on the street."

That blood is now just beginning to trickle its way into the markets. All that’s left now is to clean up the mess.

Putting the bats back in the rack would be good place to start.


By the way: The National Association of Realtors (NAR) has cut its 2007 forecast once again. The group now projects a 1% decline in the median price of existing single family houses. It would mark the first decline since the group started tracking values in 1968.

In an earlier forecast the group had predicted a gain of 2.7%. That’s a 3.7% swing to the downside.

The group’s chief economist, David Lereah, has seen enough. He stepped down last week amid mounting criticism that he was nothing more than an industry shill.

He did hint that he might have something say in the future about the pressures to cheerlead within the NAR.

We’ll bring you those comments when he decides to make them. They probably won’t have anything to do with bats, but they should be pretty interesting–that is if he is as candid as Ms. Hardiman. You never know.

The Dow by the way continues to set one record after another.  It looks like the bulls have found a new place to roam.

Wishing you happiness, health and wealth,


Steve Christ, Editor

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