Subprime Mortgage Crisis? Hey – It’s About People!
By Shlomo Maital
On the day devoted to recalling victims of the Holocaust, in Israel, there is a moving ceremony in which the endless list of names of those who perished is read.
I wonder if we could organize a Wall St. Victims day, in which the names of all those who lost their homes are read. How many are there?
“Already some 5 million homes have been lost to foreclosure; estimates of future foreclosures range widely. [Moody’s Analytics chief economist Mark Zandi], who has followed the mortgage mess since the housing market began to crack in 2006, figures foreclosures will strike another three million homes in the next three or four years”.
That makes 8 million homes lost by families. Far more than in the Great Depression. And each lost home is a tragedy for a mother, father, children. Assuming 3 persons per household: 24 million people have lost their homes or will in the next few years, as they struggle to pay for mortgages whose value far exceeds the value of their homes.
Journalist Peter Eavis has done us a great service by tracking one single mortgage, with a family name, through the Wall St. machine that turned it into a toxic poison pill. (New York Times, Aug. 14, 2013, “A toxic bond that keeps causing pain”). Here’s how it goes.
The bond is GSAMP Trust 2007-NC1. GS is Goldman Sachs, who packaged the bond. NC is New Century, a mortgage lender which lent Wendy Fillmore and her husband $274,000 (in 2 mortgages), to buy a $276,000 house in Las Vegas. (Yes, 100% mortgage). “I was wondering how we managed to get approved,” Wendy told Eavis. NC didn’t care if Wendy and her husband paid their mortgage or not; because NC sold it right away to “GS”. GS packaged the Fillmore mortgage and others, as collateral for a mortgage-backed security, GSAMP Trust 2007-NC1, that got AAA credit rating so pension funds could buy it. GS didn’t seem to care much, either, if the mortgages backing the bond were any good. Those pension funds relied on their trust in Wall St. and in Goldman Sachs, which created the bond in Feb. 2007, when the housing market already had begun to look shaky. They didn’t, and couldn’t, check on every mortgage that backed GSAMP Trust 2007-NC1. The bond-rating agency didn’t, and couldn’t, check every mortgage either. That was the beauty of the whole game. The toxic poison was hidden. But it was there, for sure.
Three-fourths of the mortgage payers, whose mortgages back the GS bond, have fallen way behind in their payments, according to the Boston Federal Reserve Bank. Wendy still pays, but struggles, and is desperate, because the value of her house today is half the value of what she owes in the mortgage. And of course she can’t sell the house either, Las Vegas’ housing market is terrible. Why would you struggle to pay a $276,000 debt for 25 years only to own an asset worth half that? Well, Wendy wants to continue to live in the house. But others have simply walked away.
What about the GS people who created the toxic bond? Former GS senior manager Jonathan Sobel left GS in 2008. He is a defendant in a federal suit. He recently bought a duplex on Park Ave., NY, for $19 m.
According to the New York Times, former GS head of mortgages Daniel Sparks wrote in an email, a month before Wendy got her mortgage, that he was a ‘bit scared’ of New Century. That email will doubtless haunt him, and has been used in a Congressional investigation. He didn’t tell the pension funds that. He should have.
p.s. the monthly payment on a 30-year $274,000 mortgage, at 5.25% interest, is $1,524, or $18,000 a year. By the time Wendy and her husband finish paying their mortgage, in about 24 years, they will have paid (in principal and interest) $548,669.60.
“highly risky”. Guess what its credit rating was?