Archive for the ‘Predatory Lending’ Category

Goldman Sachs’s Dirty Little Secret

Tuesday, October 21st, 2008

Last week the American News Project put a human face on the economic crisis with a moving video report about a woman named Jocelyn Voltaire facing foreclosure on her home in Queens, New York after she fell victim to a predatory lending scheme. The report mentioned that the foreclosure was being pursued by Litton Loan Servicing, a company tied to Goldman Sachs. Given that much of the economic policy of the United States is being carried out these days by former Goldman executives, including Treasury Secretary Henry Paulson, I was curious to find out more about this firm.

It turns out that Houston-based Litton is a leading player in a field known as subprime servicing. These firms specialize in the handling of subprime (frequently predatory) mortgages in which the homeowner has fallen behind in payments and is at risk of foreclosure. In other words, they are a type of collection agency dealing with those in the most vulnerable and most desperate financial circumstances. Litton services some $54 billion in such loans.

Subprime servicers such as Litton claim their mission is to help homeowners put their mortgage back in good standing. Yet, Litton has frequently been accused of engaging in abusive practices. According to the Justia database, the company has been sued more than 100 times in federal court since the beginning of 2004. In 2007 a federal judge in California granted class-action status to a group of plaintiffs who charged that the company’s late-fee practices violated the Real Estate Settlement Procedures Act. The case is pending. Meanwhile, individual suits continue to be filed. For example, in June homeowner James J. Portley Sr. sued Litton in federal court in Philadelphia for using “false, deceptive, misleading and evasive practices” in violation of the Fair Debt Collection Practices Act (case 08-CV-02799).

Litton has also been accused of being overly aggressive in pressing for foreclosure when a homeowner has difficulty catching up. Last year the Houston Press described the controversies surrounding the company by focusing on one of Litton’s own employees who alleged that the firm had unfairly forced her into foreclosure.

Litton was founded in 1988 by Larry B. Litton Sr., who still runs the firm despite several changes in ownership. In December 2007 Goldman Sachs bought the company for $428 million, plus repayment of $916 million of outstanding Litton debt obligations. The deal was covered in the mortgage trade press, though Goldman, which may not have wanted the wider world to know of its investment, never issued even a routine press release.

Goldman is not the only major bank with direct involvement in subprime servicing (Bank of America’s Countrywide Financial is at the top of the rankings), but the movement of its executives into top federal policymaking positions raises serious questions. Is Hank Paulson’s resistance to measures that would directly help struggling homeowners a conscious or unconscious effort to help Goldman’s Litton operation?

Sunday’s New York Times business section reported that the role of Goldman alumni in handling the current economic crisis has prompted a new nickname for the firm: Government Sachs. Its involvement in the dubious business of subprime servicing suggests that another sobriquet may be in order: Bloodsucker Sachs.

State Attorneys General to the Rescue

Monday, October 6th, 2008

Jerry Brown, once derided as Governor Moonbeam because of his unorthodox ideas while serving as the chief executive of California, today showed that he is much more in touch with reality than the U.S. Congress and the Bush Administration. Brown, currently California’s attorney general, announced a settlement under which one of the worst predatory lenders will be compelled to spend more than $8 billion to assist borrowers who are confronting foreclosure.

Congress, at the behest of the Administration, approved a misguided bill that bails out major banks to the tune of $700 billion and provides little direct assistance for struggling homeowners—and still may not solve the credit crunch. Brown (photo)  and the attorneys general of ten other states went to the real heart of the problem. Earlier this year, they sued subprime lender Countrywide Financial (now owned by Bank of America) and have now gotten the company to disgorge some of its ill-gotten gains tied to the subprime mortgages it was peddling.

Today’s settlement with Countrywide – which Brown’s office played a central role in bringing about – is by far the largest recovery from a predatory lender. Bank of America, downplaying the disgrace of its subsidiary, put out a press release announcing “the creation of a proactive home retention program that will systematically modify troubled mortgages” for nearly 400,000 Countrywide customers. The release manages to avoid any use of the terms “predatory,” “lawsuit” or “litigation” – as if B of A just came up with the idea in informal discussions with the attorneys general.

What’s more important than the spin is the substance of the settlement, which includes options such as interest rate and principal reductions as well as complete Federal Housing Administration refinancing under the HOPE for Homeowners Program. There is also financial assistance for those whose homes have already been foreclosed.

This settlement by itself seems to do more to help homeowners than the whole ballyhooed federal bailout. Bravo to the AGs, who should continue using the power of crusading litigation to go after all the culprits in the crisis.

And what was it conservatives were saying about curbing “frivolous” lawsuits?

Lehman’s Bad Karma

Monday, September 15th, 2008

The downfall of Lehman Brothers is bad news for its employees and shareholders, but it is difficult to avoid the feeling that, apart from the laws of the market, the law of karma may be at work as well.

After all, Lehman was a firm built on a slave economy. It was founded as a cotton brokerage by a German family that emigrated to Alabama in the 1840s. According to Robert Rosen’s book The Jewish Confederates, partner Mayer Lehman (image) was an active supporter of the Confederacy. In 1864, the governor of Alabama enlisted him in an effort to help Southern prisoners of war being held in the North, describing him in a letter to Jefferson Davis as “a foreigner” but “thoroughly identified with us.” The Lehmans helped rebuild the economy of Alabama after the Civil War.

Some 130 years later, Lehman Brothers got involved in financing what some have called a new form of slavery: private prisons. During the late 1990s Lehman was a key underwriter for securities issued by Corrections Corporation of America, by CCA’s real estate investment trust spinoff, and by some of CCA competitors.

More relevant to the current crisis is the fact that Lehman was a pioneer in the dubious business of packaging subprime loans as collateral for high-yield bonds. It provided major financial backing for First Alliance Corp., a leading practitioner of predatory lending. For this reason, Lehman was targeted by activist groups such as ACORN, and in 2000 the firm was sued by some of First Alliance’s victims. A federal jury in the case later found that Lehman had aided and abetted First Alliance in its scheme to cheat borrowers.

Despite these early signs that securitization of shaky mortgages might have drawbacks, Lehman charged ahead. Not only did it encourage investors to take the plunge, the firm filled its own balance sheet with some $300 billion in mortgage-backed securities. Lehman paved the way for the crisis that is roiling the financial world and became one of its prime victims.

According to a 2004 article in the Wall Street Journal, Lehman CEO Richard Fuld used to tape critiques of his son’s hockey performance while watching games from the bleachers. When the boy played better, he was rewarded with Lehman stock. Assuming he held onto those shares, one can only wonder how the younger Fuld feels now that the fruits of his efforts are virtually worthless. Perhaps a bit like all those people who lost their homes to the predatory lending backed by his father’s firm.