Business - Business News

POSTED: Tuesday, Nov. 03, 2009

Mortgage-backed bonds pumped millions into Whatcom County real estate

The story of one Ferndale mortgage loan demonstrates how the global flow of investment dollars fueled home sales and home prices during the boom years that ended with a bang.

In the fall of 2006, a buyer purchased a Grandview Road four-bedroom home using a $230,000 adjustable-rate mortgage loan from Wells Fargo Bank. It had an initial interest rate of 7.95 percent and interest-only payments until 2017, with a possible payment reset date of December 2011, according to county property records.

But within a couple of years, the owner was probably making his payments to Deutsche Bank, the giant German financial institution that is the loan servicing agent for Goldman Sachs and many other firms that pooled individual mortgage loans. Pools of such loans provided streams of cash that could be used to back bonds that promised investors safe, steady returns based on the loan payments from thousands of individual homeowners.

In August 2008, Wells Fargo filed a notice with the Whatcom County Auditor's office, indicating that the Ferndale mortgage had been sold to something called GSAA Home Equity Trust 2007-4. Deutsche Bank collected payments, but the "GS" in the trust's name stands for Goldman Sachs.

U.S Securities & Exchange Commission regulatory filing indicates that GSAA Home Equity Trust 2007-4 contained 2,810 mortgage loans from all over the country, including two from Bellingham as well as the one from Ferndale. The same filing also indicates that 55 percent of those loans - including the one from Ferndale - were "stated income" loans. That means the buyer was not required to prove his or her actual income.

By October 2008, years before the loan reset date of 2011, the Ferndale borrower was already in deep trouble. Deutsche Bank's loan trustee filed a notice of foreclosure, scheduling a foreclosure sale for Jan. 2, 2009.

But property records indicate that the borrower managed to find a buyer for the home before that, and may have managed to get some cash out of the deal.

Holders of bonds backed by GSAA Home Equity Trust 2007-4 were not so lucky. That Ferndale mortgage was not the only one in trouble. By August 2008, Standard & Poors had downgraded vast quantities of mortgage-backed bonds.

S&P estimated that the losses on that GSAA trust would be close to 15 percent. That's not the kind of loss that buyers of investment-grade bonds are generally willing to risk.

In December, the NECA-IBEW Health & Welfare Fund, which provides benefits to union electrical workers, filed a class action lawsuit against Goldman Sachs in connection with the GSAA trust and several similar mortgage loan pools. The lawsuit claimed that Goldman Sachs had misled the union fund and other bond investors about the level of risk involved with their mortgage bond investments.

Among other things, the lawsuit alleges that many of the mortgage loans in the Goldman Sachs pools had been based on misstatements of borrowers' income levels, and inflated appraisals of the homes that served as collateral for the loans.

But Goldman was hardly alone. Major financial firms around the world had assembled similar loan pools and issued bonds that have often left investors with substantial losses. A quick glance at Whatcom County foreclosure filings shows many loans were transferred to these kinds of pools after the loans were made.

Susan Templeton, a Bellingham mortgage planner, said few if any borrowers realized where their loan money was coming from during the boom years.

"They wouldn't hear Goldman Sachs because Goldman Sachs was just dealing in the background," Templeton said.

Without the money from international bond investors, channeled into home mortgages by Goldman and other players, the real estate boom and bust would likely not have occurred. After the lenders sold their loans to the financial firms, they had money to make another round of loans, adding more fuel to an overheated market.

"Goldman had a close relationship with a lot of loan companies," Templeton said. "Those companies would not have existed if they didn't have somebody who was going to pick up the package."

Subprime mortgage lending formed a relatively small part of the local real estate picture. According to data compiled by First American Core Logic, only about 1,000 subprime loans were outstanding here as of July 2009, compared to about 35,000 conventional loans.

But almost 35 percent of those subprime loans were more than 60 days delinquent as of July, putting those homes at high risk of foreclosure.

Among the 35,000 conventional loans in the county, less than 3 percent were 60 or more days delinquent as of July.

Nationwide, the delinquency rate on conventional prime mortgage loans is 6 percent, while the rate on subprime loans is close to 40 percent.

Templeton said the foreclosure rate here is lower because real estate values have not fallen as far as they have in bubble states like Florida, Nevada, Arizona and California, which lead the nation in mortgage delinquency and foreclosure rates.