by Gary Rivlin
Since its inception, Self-Help’s bylaws have dictated that no employee can earn more than three times the pay of the lowest-paid person on the staff. At the end of 2008, some Self-Help workers made $23,000 a year, so that meant Eakes, despite the size of Self-Help and his fancy credentials, was earning a salary of $69,000. “He’s a guy who could have made a bazillion dollars on Wall Street if he didn’t have these social goals,” Calhoun said. “Martin is a hard-nosed businessperson. Make no mistake about it.”
Despite its inability to pay big salaries, Self-Help has never had trouble filling its headquarters with young graduates with advanced degrees from redoubts like Harvard and Prince ton. Its halls are filled with Eakes clones, nerdy and smart and over-degreed and seemingly indifferent to their clothes and their cars. Some years back, when the maximum salary at Self-Help was $32,000 a year, a potential funder came to visit. He took one look at the employee parking lot and shook his head. Never in his life, he said, had he seen such a collection of junkers in a single place. “Basically you could describe Self-Help as a bunch of misfits,” Eakes said. New initiatives seem to be born at night, when people find Eakes in his office and sit to spend an hour or two puzzling through a problem. Eakes describes himself as an introvert but friends and even subordinates scoff at that characterization. Being around other people seems to enliven him, and he certainly doesn’t seem an introvert during staff meetings when he’s acting like the class clown.
Yet Eakes seems to have mixed feelings about the limelight. I’ve seen him speak and he’s a natural, playful and chatty and entertaining, yet he says, and people around him confirm, that he genuinely would prefer to remain at the office and let others take the podium on Self-Help or CRL’s behalf. “He probably turns down ten requests to speak for every one he accepts,” said Mark Pearce, who worked as a top Self-Help executive between 1996 and 2006. “To Martin, testifying before Congress or a state legislature—any kind of public speaking—is a necessary evil that he’ll do only if he can convince himself he has no choice.”
That’s not to say Eakes lacks a robust ego. At times he can come off as supremely confident—even cocky. Within the first few minutes of our first meeting, he mentioned an email he had just written to the chief of staff of an important congressman and then dropped the names of two senators with whom he’d recently spoken. “We’re going to get the mortgage industry cleaned up over the next year,” he said over lunch, “and then we’ll be able to take care of these other issues like payday loans and credit card overdraft fees.” He said this matter-of-factly, as if these vexing national issues were just chores his wife had asked him to do on the way home from the office. Given Self-Help’s modest roots, I asked Eakes, was he astonished by its soaring success? “Not really,” he said with a shrug.
With the recognition and the acclaim, the deposits flowed in, and with more capital to work with, Eakes and Self-Help were able to get more ambitious still. A fund was established expressly to loan money to people wanting to get in the day-care business and the credit union got in the charter school financing business as well. Self-Help financed a homeless shelter in Durham and a large home that served as an early sanctuary for people with AIDS. Self-Help even acted in the role of a developer, buying landmark buildings in cities around North Carolina where it had a branch, rehabbing the properties, and then leasing offices to local nonprofits at a discount.
Self-Help’s boldest move began when Eakes started to think about the limits of what he had built. By the mid-1990s, Self-Help was up to seven branches around the state, but in ten years the organization had helped maybe one thousand families buy a first home. Some might have been impressed with Self-Help and its pace of growth but Eakes was struck with how slowly they were moving. That was what propelled him to make the drive to Winston-Salem, ninety minutes from Durham, to meet with Leslie “Bud” Baker, Jr., then the president of the Wachovia Corporation, one of North Carolina’s largest banks.
“We knew we were never going to be big enough to have the kind of impact we wanted to have,” Eakes said. “But Wachovia had branches all over the state. If we could get Wachovia to make loans to single African-American mothers, it would have a much bigger impact than we ever could.”
In Baker’s office, Eakes offered Self-Help’s clients as Exhibit A. His borrowers might not seem loan-worthy at first glance but they also realized this might be the only chance in their lives to own a home. They had less of a financial cushion than those in higher income brackets and were more likely to fall behind in their payments, Eakes conceded. But by that point, Eakes and Self-Help had been in the home loan business for nearly a decade. They had foreclosed on only three homes, and in all three cases the credit union had recouped its original investment. In almost ten years, they had yet to write off a single loss.
Eakes didn’t persuade Baker to start loaning Wachovia’s money to low-income families that first time they met. He failed to convince him a few months later when they met again or when he visited him for a third time several months after that. It might have been the right thing to do, and also judicious given the Community Reinvestment Act, but it also meant breaking with the established benchmarks of lending and Wachovia was a traditional, old-fashioned bank. When Baker finally relented, he told Eakes, “We’ll give it a try. We’ll make $10 million worth of these loans. I think we’ll lose half that money but it’s worth it to get you out of my office so I don’t have to hear you talking anymore.” As Eakes likes to tell the story, he walked out of Baker’s office without another word.
As Baker had promised, Wachovia wrote $10 million in home loans to those with solid work records but tarnished credit ratings, and Wachovia would write another $10 million in similar loans after that. But though people inside Wachovia assured Eakes the loans were performing well, they also told him that was more or less it. The bank didn’t feel comfortable carrying more than $20 million in nontraditional, subprime loans on its books.
That was when Self-Help decided to take the truly revolutionary step of creating a secondary market for subprime loans. As Eakes saw it, Self-Help could help so many more people if they had more than just a dozen or so loan officers scattered around a single midsize state. That was Eakes’s pitch to Bud Baker and the other bank presidents with whom he would meet. “I said to them, ‘Most people covet your money but I covet your delivery mechanism. You have branches all over the state. You have twenty thousand loan officers all over kingdom come. You can reach every little neighborhood we can’t.’” And if joining in his cause wasn’t reason enough to play in the secondary market he was creating, there were more concrete advantages as well. “I would tell them,” Eakes said, “‘We’ll pay you a fee, you’ll make your money, and you get to be the hero and get your CRA credits.’”
Again Eakes started with Wachovia, whom he approached with a unique offer. We’ll buy all the $20 million in loans you’ve made to low-income clients, he told Baker, if you promise to use the proceeds to make more loans to people of modest means. The catch was that Self-Help was going to borrow most of that $20 million from Wachovia itself. They’d put up $2 million as a down payment and the $20 million loan portfolio would serve as the collateral for the loan. “We were taking all the credit risk,” said Mike Calhoun. “If the mortgages went bad, we were out our reserves and the entire portfolio with a book value of $20 million reverted to them.” They would pay market rate on the loan to Wachovia but Calhoun and others had done the math: Self-Help would still come out ahead if all went as planned. Wachovia said yes and, Calhoun said, “We knew we were in business.”
Eakes was anxious to approach other banks with what he called his “godfather proposition”—a deal too good to refuse. Holding him back was a lack of cash. To make that first $20 million deal work, Self-Help needed to make a $2 million down payment, and it wasn’t as if the organization had that kind of money lying around to write more checks of that size. As luck would have it, one of Self-Help’s biggest financial backers, the Ford Foundatio
n, which had aided Self-Help dating back to its worker-owned cooperative days, was confronting a unique challenge: the need to spend a lot of money and spend it fast.
By law, a foundation must pay out at least 5 percent of the total worth of its holdings each year, and in 1998, with dot-com fever fueling the stock market, the Ford Foundation’s portfolio ballooned. “I have a really big idea,” Eakes began when contacting his liaison at the foundation, and his timing couldn’t have been better. Ford gave Self-Help $50 million to help underwrite this new secondary market for subprime real estate loans, and with the commitment from Ford, Self-Help was able to convince Fannie Mae to guarantee the loans. Self-Help’s money would still be on the line—the company had to indemnify Fannie for 100 percent of any losses—but the mortgage giant’s imprimatur meant that this relatively anonymous, relatively small, Durham-based nonprofit could package and resell mortgages to Wall Street.
The process was called “mortgage securitization.”
Five
Freddie Rogers
DURHAM, NORTH CAROLINA, 1999
The staff of Self-Help was so focused on their mission of expanding access to mortgage credit for the working poor that for a long time—despite some high-profile warnings—they didn’t notice they had competition. One of the most prominent was the investigative piece that ABC’s Primetime Live did on a company called Associates. It featured an interview with a former Associates loan officer who claimed he could barely live with himself while he worked there, given the gimmicks he was taught (talk fast, turn the pages fast) by higher-ups to trick people into signing for loans they couldn’t possibly afford. A second former employee told of the “tremendous pressure” every loan officer felt to pack loans with expensive extras, and both confessed to witnessing fellow agents forge signatures. The Wall Street Journal ran an equally unflattering piece about Associates focused on a single customer, a retired quarry worker named Bennie Roberts living in Virginia on $841 a month in Social Security and retirement benefits. The Journal found that Associates, a subsidiary of the Ford Motor Company, had refinanced, or flipped, Roberts’ loan ten times in four years, costing him $19,000 in fees on what had originally been a $1,250 home equity loan. Associates would even earn its own chapter in a book called Merchants of Misery, edited and largely written by a reporter named Mike Hudson. But who had time for books or the Wall Street Journal or TV when inside Self-Help they were busy saving the world? “It’s a tough act to run the business we do,” Mike Calhoun said.
Then a man named Freddie Rogers, a widower in his fifties raising a daughter on his own, walked into Self-Help’s offices. “I think we’re basically self-honest about where we’re making a difference and where we’re not,” Eakes said. And Freddie Rogers, earning $8.24 an hour driving a bus for the Durham public schools, showed Self-Help “that just one predatory lender like Associates was doing more harm than all the good we were doing.”
Lanier Blum took an instant liking to the tall black man who showed up in her Self-Help office in the fall of 1998 interested in talking about a new home loan. Borrowers at Self-Help typically seem to arrive wearing whatever they happen to have on, but Freddie Rogers had dressed smartly in nice slacks, a button-down shirt, and a stylish hat worn jauntily on his head. “I had business to take care of,” he would later explain. He was outgoing, warm, and chatty, and he showed Blum pictures of his daughter and spoke lovingly about his wife, who had died some years earlier. “He was a very, very charming guy,” Blum said.
Self-Help had always focused on first-time homebuyers. But Blum had recently been put in charge of a new product Self-Help was experimenting with called the “fix-it loan.” Borrowers seeking a mortgage on a home that needed extensive repairs were eligible for a fix-it loan but so, too, were homeowners who needed money to make the basic repairs so a property holds its value. That was Rogers, who years earlier had bought a home with his wife in a semirural neighborhood on the southern outskirts of Durham. Drainage problems caused the basement to flood, and the flooding, along with a lack of proper ventilation, was causing mold to form on walls inside the house. Worse, there were no sewer or water lines in that part of the city and the septic tank they used for their waste had developed a leak, which was fouling the water of a well they relied on for their drinking water. It had gotten so bad, Rogers explained to Blum, that he and his daughter had been forced to move out until he could find the money to make the repairs.
Blum was familiar with the community where Rogers lived, an historically black section of town not far from a large regional mall that had recently opened near the interstate. Subdivisions were popping up all around that part of town, and, though Rogers still lived in a neighborhood with gravel roads and few amenities, his was a potentially hot property. Already there had been noise about rezoning the area to encourage outside investment. “I really wanted to help him stay where he was living,” Blum said. “He was obviously very attached to the house because he had bought it with his wife. But I also thought he could be in a position to do very well if the area was developed.”
Rogers had served in the army when he was young and then taken a job with the Durham schools, where he had worked since the early 1960s. “He seemed a real stable guy,” Blum said. “He had some credit issues but nothing too terrible. I thought, Let’s get a payoff quote and see what we’re dealing with.” She phoned Irving, Texas, where Associates had its headquarters—and then she phoned and phoned and phoned some more. “We absolutely harassed those people,” said Blum, whom Eakes has nicknamed “the Pest.”
At first the sticking point was the payoff figure. The person on the other end of the phone refused to give it to her, though refusing a payoff quote for a borrower is akin to a credit card company declining to tell a customer the total amount he or she owes in back charges. When finally someone provided Blum with the dollar figure, that only served to confuse the issue further. Rogers had records showing that while he was often late in paying his mortgage, he had never missed a payment, yet Associates was claiming he still owed the company nearly as much as he had borrowed ten years earlier. In all those years he had managed to pay down the principal by only a few thousand dollars. That must be a mistake, Blum told herself, so she asked someone to fax over a copy of his payment history. That seemed no more complicated than making a few taps on a keyboard but a company representative claimed that information wasn’t available. The Pest persevered until eventually somebody in Irving faxed over pages of records that Blum was convinced had been fabricated, and she handed the file off to Self-Help’s loan servicing department.
At that point, Blum wasn’t suspicious so much as curious. Sure, the people on the other end of the phone couldn’t respond in a straightforward manner to a routine request, but she figured they were some fly-by-night operator staffed by incompetents. “I had never seen a loan like this,” Blum said. “I really wanted to know what these other lenders knew that we didn’t know.” More borrowers came in seeking a fix-it loan and they too had loan terms similar to Rogers’s. At Self-Help, they required down payments of at least 5 to 10 percent, yet Associates and other lenders proved willing to write loans valued at 100 percent of the assessed worth of the property. “I was thinking, Why are we being so conservative? What have these banks figured out that we haven’t?” said Blum. These other lenders were charging interest rates four, five, or six percentage points higher than Self-Help’s, if not more. That struck Blum as a steep premium but she also had to ask herself if Self-Help was taking more risk than people inside the organization realized.
“We always saw ourselves as the high-risk lender of last resort,” said Blum, who had a degree in city planning, not finance. “We thought we were the ones out there providing loans to our customers where no one else was doing it. It came as a surprise that there were even these other players in the communities we were serving.”
The truth would emerge once Blum, with the help of others inside Self-Help, was able to piece together the details of Rogers’
s loan. Years earlier, he and his wife had borrowed $29,000 through the Veterans Administration to buy their home, but then they had allowed themselves to be talked into refinancing with Associates. Under the new loan terms, they were paying 13.7 percent in interest and now owed $47,500, including thousands in fees and thousands more for a credit insurance policy. Associates hit Rogers with a penalty fee every time he was late with a payment, as any lender would, but the company would also tack on extra interest charges, treating his account as if it were perpetually in arrears. The bottom line was that Rogers was stuck. His home was not worth enough to justify the size of the loan Self-Help would need to pay off Associates and still have enough money left over for Rogers to make the necessary repairs on his property. And even if Self-Help were inclined to take the risk, Rogers, with a salary of around $17,000 a year, didn’t make enough to reliably cover the monthly payments.
“It took us some time,” Blum confessed, “but we eventually realized this wasn’t just an issue of one guy. This was a big company out there and they were lending a lot of money to a lot of people.”
Blum stopped by Eakes’s office one night when both were working late. She told him about Rogers’s predicament and Eakes pulled out his calculator. Had Rogers refinanced his loan through Self-Help and made the same monthly payments he had been making to Associates, Eakes found, he would have paid off his loan in full and even built up a modest-sized savings account. Instead he still owed Associates nearly as much as he had borrowed. Freddie Rogers’s only crime was that he, like much of the populace, wasn’t financially sophisticated. It had ended up costing him tens of thousands of dollars and it might well cost him his house. “This is scandalous,” he declared. He promised Blum he would call Irving, Texas, the next day.
Pretty much any housing activist or consumer advocate who has heard Martin Eakes speak in public in recent years has heard the story of the phone call Eakes made to Texas on behalf of Freddie Rogers. The woman on the other end of the line accused Eakes of being a competitor out to steal a loan away from her company. She was evasive and dodged basic questions that a lender was legally obligated to answer. “I just snapped,” Eakes said. “I just started making a lot of threats.” We’re going to get this borrower out from under your thumb, he told the woman. We’re going to drive your company out of our state. “You’ve picked a fight with the wrong guy at the wrong time,” he told her. It was only after he hung up the phone that, with the help of his staff, Eakes realized he had threatened to boot from North Carolina one of the two or three largest consumer finance companies in the world.