Inside a Subprime Mortgage Bundle...6 years later

Peter Eavis @ NYT's Dealbook:

A subprime deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.
He is not the only one feeling the pain of a subprime transaction six years on.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.

Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

This is the story of one of those bonds, GSAMP Trust 2007 NC1.

The name is the sort of gobbledygook that is common in the bond market, but it tells a story. The “GS” is derived from Goldman Sachs. The Wall Street firm didn’t actually make mortgages to subprime borrowers that were in the deal. Instead, Goldman bought them from a lender called New Century, the “NC” in the title.

It was New Century that lent to Wendy Fillmore, when she and her husband wanted to buy their house in Las Vegas in 2006. The home cost $276,000. New Century provided two loans, one for a $221,000 loan and a second mortgage for $53,000. Data for the Goldman deal shows that it contains the Fillmores’ larger loan.

Ms. Fillmore’s husband was, and still is, an information technology specialist, and at the time she was working as a transcriber. She recalls the surprise she felt when New Century agreed to the make the mortgages.

“I was wondering how we managed to get approved for as much as we did,” she said.
The reason had a lot to do with the appetite for mortgages by Goldman and other Wall Street firms that had a booming business in slicing and dicing and repackaging the loans in securities.

A month before Ms. Fillmore got her mortgage, Daniel L. Sparks, Goldman’s head of mortgages, wrote in an e-mail that he was a “bit scared” of New Century and had reservations about Goldman taking more loans from the lender. The e-mail was contained in materials released by Congress as part of an investigation of Wall Street.

Mr. Sparks gained prominence in 2010 when he testified in Congress about Goldman’s mortgage dealings, including a deal that resulted in a $550 million fine for the firm. He is one of the four bankers who signed off on the 2007 bond, according to a lawsuit filed by a federal regulator that is litigating the deal and other transactions. Mr. Sparks, who left Goldman in 2008, is named as a defendant in the federal action. He declined to say what he is doing now.

Ms. Fillmore is still in her Las Vegas home. She estimates that the market value of the house is around half the combined value of her two mortgages.

“It is frustrating to be so far underwater,” she said. “It’s horrible. We can’t move. We just try not to think about it.”

Deals like the Goldman one leave a rich paper trail that includes many details about the loans that were contained in the bond. The numbers are jaw-dropping.

Three-fourths of the borrowers in the deal have fallen well behind on their payments at some point, according to a special analysis of the deal performed by the Federal Reserve Bank of Boston. Many of those people have lost their houses or will lose them. Nearly half the loans in the bond have been in foreclosure proceedings since it was issued, according to the Boston Fed.

One of Mr. Sparks’s former Goldman colleagues is Jonathan S. Sobel, who also left Goldman in 2008 and is also a defendant in the federal action. A year ago, Mr. Sobel and his wife acquired a duplex apartment at 740 Park Avenue, one of the city’s most coveted addresses, according to New York property records. They paid $19.3 million.

A few months before that purchase, Anthony Haynes, a New York subway train driver, was forced to sell a house in Brooklyn that had been in his family since just after World War II.

In 2006, New Century lent him $500,000 against the property. A renovation of the house didn’t go as planned, Mr. Haynes said. It also turned out that he couldn’t afford both the mortgage payments and other bills, like child support payments.

“I am glad to be rid of the financial burden, but I did like the house,” he said.

Property records indicate that he sold the house last year for $330,000. The entity that bought it from Mr. Haynes then sold it a few months later for $550,000. Mr. Haynes lives in an apartment in Brooklyn that he and his wife own.

The question today is whether risky mortgage loans should ever have been put in the Goldman bond. Critics say the banks did not properly portray the full risks of the loans bundled into bonds.

Since the financial crisis, many lawsuits have been filed against banks, asserting that banks filled bonds up with loans that didn’t meet agreed-upon standards. Last week, for example, the Justice Department and the Securities and Exchange Commission sued Bank of America over $850 million of jumbo mortgage-backed securities.

Fannie Mae, the mortgage finance giant now owned by the federal government, bought the largest slice of the Goldman deal. In 2008, Fannie was bailed out and taken over by the government, effectively transferring all its assets, including the Goldman bond, into taxpayers’ hands.

Fannie’s regulator, the Federal Housing Finance Agency, is suing Goldman and many other banks to recoup losses on bonds that the company bought. The agency asserts that the four Goldman bankers who signed the bond’s documents were directly responsible for what it says were misstatements and omissions in the deal. None of the men work for Goldman anymore.

They weren’t keen to talk.

The lawsuit says one of the signatories on the deal was David J. Rosenblum. A former Goldman employee of that name now works at Prophet Capital Asset Management, an investment firm based in Austin, Tex. When reached on a Prophet Capital phone number, Mr. Rosenblum declined to say whether he had a connection with the deal.
“I am just a little hermit in my little hermit crab shell,” he said.

Mr. Sobel, the Park Avenue resident, didn’t respond to requests for comment.
One central figure from the time did talk, though.

Daniel Mudd was Fannie Mae’s chief executive when the company bought a $480 million slice of the Goldman bond.

“It doesn’t ring a bell,” he said, when asked whether he remembered the deal.

His tenure at Fannie has been criticized because it was the period when the firm piled into riskier mortgages. Today, Mr. Mudd offers a general defense of Fannie’s subprime strategy: “If you look at the performance of any of the nonprime business that Fannie did, the performance is in an order of magnitude better than business done at other institutions.”

Mr. Mudd is also caught up in subprime litigation. He isn’t a defendant in the suit aimed at the former Goldman bankers. But in 2011, the Securities and Exchange Commission brought civil actions against Mr. Mudd and other former Fannie Mae executives, claiming that the company understated its exposure to subprime mortgages.

After Fannie, Mr. Mudd joined the Fortress Investment Group, an investment firm, but resigned in early 2012.

Looking back at the turbulence of the intervening years, Mr. Mudd, an ex-Marine, said, “You continue to march.”

It has been a long road for Ms. Fillmore, the Las Vegas homeowner. But she and her husband decided to persevere with their loan. “It has crossed our minds to walk away from the house. But we’ve put too much into it,” she said. “We don’t want to give up and lose the house and the past six years of payments.”

The Fillmores’ experience shows how much homeowner relief efforts can help.

Their debt load was lightened in 2010 after she visited an event held by Neighborhood Assistance Corporation of America, an organization that helps consumers get help with their mortgages. “They really helped pull our fat out of the fire,” Ms. Fillmore said. The group worked with the company that services her larger loan to make it more affordable. Its principal was reduced to $193,000, from $221,000, according to property records.

Deborah Harris, of Windsor Locks, Conn., also benefited from an adjustment to her mortgage. She took out a $168,000 loan from New Century in December 2006 to buy a house. The loan was placed in the 2007 Goldman deal. She says modifications have halved her monthly payments. “I could have been one of the statistics, most definitely,” Ms. Harris said. “I guess I was one of the lucky ones who stayed in their homes.”

One-fourth of the loans in the Goldman bond have been modified, according to the Boston Fed’s analysis. Not all of those succeeded, though. Of the 9,393 loans originally in the deal, 14 percent have been modified and are still current on their payments.

Today, the borrowers whose loans were put in the Goldman bond say they have been chastened by their experiences with debt.

“If I could take everything back, I never would have got involved,” Mr. Haynes, the Brooklyn resident, said.

Goldman’s bond expires many years from now, in 2037. Some borrowers, like Curtis Williams, who borrowed $193,500 in late 2006 against her house in Jacksonville, Fla., and whose loan is part of the Goldman deal, aren’t going anywhere.

“As long as I can stay here, I will,” she said.