SAN JOSE, Calif. —When California wildfires ruined their jewelry business, Tony Becker and Celia Fabos-Becker fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.
The husband and wife 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.
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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 capitalize neither 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 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 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.
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.
Becker, an engineer, took short-term contract jobs amid the technology bust. 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 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. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.
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.