Greg Gordon, McClatchy Newspapers
SAN JOSE, Calif. — When California wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.
The couple wound up in a desperate, six-year fight to keep their modest, 1,500-square-foot San Jose home, a struggle that pushed them into bankruptcy.
The lender with whom they sparred, however, wasn’t the one that had written their loans. It was an obscure subsidiary of Wall Street colossus Goldman Sachs Group.
Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers.
The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman’s then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.
Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.
In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.
Theirs is an infrequent happy ending among the hundreds of cases in which subsidiaries of Goldman, better known for sending top officers such as Paulson to serve in top Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers.
Goldman spokesman Michael DuVally declined to comment on individual cases or on the firm’s new role in bankruptcy courts.
Joining other Wall Street firms that bought millions of subprime mortgages, Goldman companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower-income Americans who couldn’t keep up with their loans’ soaring monthly payments.
Some borrowers were speculators or homebuyers who exaggerated their incomes on loan applications, thinking they’d always have an escape hatch because housing prices would keep rising. Others, however, were victims of fast-talking mortgage brokers who didn’t explain that the loans’ interest rates could rise to as high as 15 percent. Many borrowers who defaulted on their mortgages may never qualify for a home loan again.
In court encounters, Goldman and other Wall Street firms have faced the impact of their own wheeling and dealing. Many of the families being put on the street never would’ve gotten their big mortgages if investment banks hadn’t provided a seemingly insatiable secondary market for millions of loans to marginally qualified buyers.
Subprime borrowers were supposed to provide a safe income stream for investors who bought mostly high-grade, triple-A-rated bonds from Goldman and bigger subprime players, such as now-defunct Lehman Brothers and Merrill Lynch.
Now, millions of these borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds’ value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and either the seller or the lender takes a loss.
Earlier this year in Los Angeles, the Wall Street giant took possession of the home of Gladys Aguirre, a housecleaner who’s married to a construction worker. Together, the couple listed monthly earnings of $7,480, including $3,480 from a job she’d held for two months.
Aguirre originally took a $444,000 subprime mortgage on Sept. 1, 2005, from Argent Mortgage Co., a subsidiary of big subprime lender Ameriquest Mortgage Co., which shut down in 2007. The adjustable interest rate sent her monthly payments zooming to $3,800 from $2,479, and Aguirre couldn’t keep pace on that loan or a $119,000 second mortgage. She filed for bankruptcy protection.
Aguirre’s Los Angeles lawyer, Eber Bayona, declined to discuss her case, but said that subprime loans amounted to “setting up the person for failure” because interest rate adjustments hit borrowers with “shock payments.”
For example, he said, loan agents promised applicants that they could buy a $600,000 house for payments of $1,200 a month, and the buyers “never read the fine print … (and) didn’t know their interest would increase and that eventually they would lose their house and their money.”
In San Fernando, Calif., Dina Alfero-Pacheo qualified for two mortgages totaling nearly $500,000, with monthly payments starting at $2,004. By 2007, the payments had grown to $3,761. In a bankruptcy filing early this year, Alfero-Pacheo said she was a bartender earning $3,800 a month. Goldman bought her first mortgage from Argent and recently got title to the house, which had sunk in value to $280,000 from more than $500,000.
In Orlando, Fla., Adela Mendez seems to be someone who would’ve known the risks when she took a $164,000 mortgage from Argent on her home in 2005 and a $75,000 second mortgage a year later. In a bankruptcy filing this year, she listed her occupation as a loan specialist for Washington Mutual, a leading subprime lender that collapsed last year.
Not only did Mendez fall 11 months behind on her mortgage payments, but her home’s value also plummeted to $100,000. Goldman Sachs Mortgage, which bought the Argent loan, took the house — and at least a 50 percent loss.
Alfero-Pacheo and Mendez, whose cases are detailed in court records, couldn’t be reached to comment.
The Beckers charged that in their case, Goldman engaged in years of obfuscation and resistance.
“In bankruptcy court, they tried to portray us as incompetent or deadbeats,” said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them.
The couple thought they’d made a safe bet in 2000 when they opened a retail jewelry business in two San Diego County areas populated mainly by military personnel.
The wars in Afghanistan and Iraq, however, brought big military call-ups, sapping their market. After a wildfire ravaged much of the area in 2002, the Beckers refinanced their house to generate some $70,000 in cash to prop up their two stores. They wound up with an adjustable-rate, subprime loan from WMC Mortgage Corp., an arm of General Electric’s GE Money unit, and a 10.75 percent second mortgage with the same lender.
A second wildfire in 2003 all but killed their business and left the couple reeling financially as interest-rate adjustments pushed the mortgage payments higher.
“We’d gotten to the point where I was cutting my own hair. I was cutting his on occasion,” Fabos-Becker said.
“And trolling the Goodwills,” Tony Becker said.
Tony Becker, an engineer, took short-term contract jobs amid the technology bust. Celia Fabos-Becker, meanwhile, found a provision in the mortgages that allowed the borrower to push payments to the end of the loan term in the event of a disaster such as the two fires.
When she wrote to Paulson, however, lawyers for Goldman denied that it owned the Beckers’ mortgages. So did Germany’s Deutsche Bank, a trustee that was holding thousands of subprime mortgages Goldman had converted to bonds.
To stall foreclosure, the Beckers wound up negotiating “forbearance agreements” with Ocwen Loan Servicing, a Florida company, that required the couple to pay several thousand dollars under the threat that their house would be auctioned off in a week or a month, Fabos-Becker said. Their monthly payments rose to nearly $3,300 from $2,650.
The couple already had taken Goldman and Morgan Stanley, another Wall Street firm, to arbitration over their $325,000 in stock market losses, accusing the investment banks of misleading investors about public offerings.
On the same day in June 2006, Goldman sued to end the arbitration, and Ocwen filed papers seeking to foreclose on the Beckers’ home.
In desperation, the couple filed for bankruptcy protection. With no money to hire an attorney, they acted as their own lawyers.
As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm’s relationship to Goldman, telling the attorney that he hates “spin.”
The lawyer acknowledged that MTGLQ was a Goldman affiliate.
That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that’s housed at the company’s headquarters at 85 Broad Street in New York, public records show.
In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose “significant sanctions” if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple’s original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.
That lowered their monthly payment to $1,900, less than half the maximum $4,000 a month their subprime loans could’ve demanded.
Fabos-Becker, 60, said that the trauma has left her hair “a lot grayer.” Much of the stress would have been alleviated, she said, if a law required lenders to identify themselves, especially to borrowers facing hardships.
“I take solace,” Tony Becker said, “in knowing that I was up against the worst possible opponent — the biggest, strongest investment bank in the world.”
(Tish Wells contributed to this article.)
PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay. I’m talking with Greg Gordon from McClatchy Newspapers. Thanks for joining us again, Greg.
GREG GORDON, INVESTIGATIVE REPORTER, MCCLATCHY: My pleasure.
JAY: So in the second part of your series about Goldman Sachs and their adventures in the subprime market meltdown—and I should say adventures. We should say they’re very successful adventures. As you pointed out in the first part, Goldman Sachs was one of the companies that knew how to bet both ways on the crisis and came out of it both ways. One couple was affected by this, and you talk about them in your part two. Tell us their story.
GORDON: We really tried to show how big firms like Goldman Sachs had found themselves sort of dragged into the muck of the subprime meltdown, because you wouldn’t normally expect to find this glittery, you know, 24-carat Wall Street firm filing papers in bankruptcy courts across the country to take people’s houses away from them. But that’s the role in which they have been cast, because they have to protect the value of the bond holders, the pension funds and insurance companies and foreign banks that bought these bonds and were expecting a high yield, and then found out that there is a high foreclosure rate among subprime borrowers who just couldn’t keep up with payments that went through the roof. And so we described the story of Tony Becker and his wife Celia Fabos-Becker of San Jose, California, who had some really unfortunate hits that they took in their attempts to set up a jewelry business in San Diego County. And they were hit by not only two California wildfires but two wars. When the United States sent troops into Afghanistan and Iraq, those couples’ primary customer base was military personnel, and the call-ups just about wiped out their business, and ultimately the second California wildfire did. So in the middle of all this, they decided they needed some cash, and so they refinanced their house, just a 1,500 square foot house right next to the Capital Expressway in San Jose. And they got about $70,000 in cash out to try to inject some life back into their business. It didn’t work. But what they ended up with were two subprime mortgages. And the mortgages were soon sold to a Wall Street firm.
JAY: Now, just back up. When you say two, was that a first and a second?
GORDON: Yes, it was.
JAY: So essentially they’re getting a loan for the entire value of the house.
GORDON: They have a little equity left, but they had a first loan for about—and I want to say—$280,000, and the second loan for the balance, for a total of $356,000. And so it wasn’t even a huge loan, but given the way California real estate was going up, that really was almost a very modest loan. At any rate, as the business started to suffer, they fell behind on their payments. These people are real tenacious people, the Beckers. They know how to fight, to protect themselves, to make sure that they’re not wronged, etcetera. Tony Becker—to digress a moment, Tony Becker had co-owned a Silicon Valley business and walked away in 2000 with a $1.7 million check. And they used a third of that money to pay taxes, a third of it to put in the jewelry business, and a third of it to invest in some securities on Wall Street. The Wall Street stuff went south. The jewelry business went under. So here they are, falling behind, and Celia Fabos-Becker scours the mortgage documents and discovered a federally mandated clause that says, if you fall behind because of a disaster, you can negotiate to move those payments to the end of your loan term. And she said, “Oh, this is a way out for us.” Only problem was she couldn’t find anybody to negotiate with, because nobody would admit to owning her mortgage. Finally, in 2003, this couple got a tip that Goldman Sachs was the mortgage holder. So she wrote a letter to the chairman and CEO of Goldman Sachs. Who was that? Henry Paulson. We all know Henry Paulson later went on to become the US Treasury secretary. Goldman wrote back and said, “We don’t own your mortgage.” So the couple was stymied for about three years, and they were at the end of their rope at times, because they were dealing with a loan servicer that kept threatening to seize and auction off their home, and they would do these what they call forbearance agreements, where for agreeing to make a higher monthly payment, they could pay some cash and put some of it off.
JAY: But who does the loan service—who does the collection agency work for? Someone has to be hired—having hired them.
GORDON: That’s right. And this firm is Ocwen Loan Servicing. But, see, when Wall Street bought these loans, they put them into trusts, and this loan was sitting in a trust account that was set up by Goldman Sachs and was being managed by Deutsche Bank. So they wrote to Deutsche Bank as well, and Deutsche Bank said, “We don’t own your mortgage.” So this went on for three years. And finally, in 2006, on the same day the couple had filed a complaint or an arbitration claim over their investments losses against Goldman and Morgan Stanley, taking on two Wall Street giants, Goldman filed papers to throw out the investment claims. And on the very same day, Ocwen, the loan servicer, filed papers to seize their house. So they were under siege, and it was not long after that that they felt cornered and decided to file for bankruptcy protection. [snip] leading up to the bankruptcy court. Finally, an obscure subsidiary of Goldman Sachs, housed in Goldman Sachs’s offices at 85 Broad Street in New York, acknowledged that it held their mortgage. And three years after they finally found out who held their mortgage, three years later, this couple finally got a settlement with a bankruptcy judge threatening to impose sanctions against Goldman Sachs if it didn’t get this done, and Goldman gave them a 30-year 5 percent mortgage. Their payments are now $1,900 a month. Their subprime mortgage payments had threatened to rise to $4,000 a month.
JAY: Well, this is one couple that had a sort of victory. And Goldman Sachs, I guess, keeps them quiet. But there’s a tremendous pattern of Goldman Sachs hiding what they were doing throughout this whole crisis. And in the next segment of our interview, let’s talk about how they go offshore to the Caribbean to channel, hide billions of dollars. Please join us for the next segment of our interview with Greg Gordon.
Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.