How one family's mortgage is linked to meltdown
HAMPTON BAYS (New York) - MRS Cynthia Goldrick's daughter is in and out of the hospital for brain surgery, her mother has Stage 4 lung cancer and her father has moved into a home for the elderly.
So when the Goldrick family's adjustable rate mortgage reset while husband Patrick was off work for a job-related injury, it eliminated the thin margin between their income and the mortgage payment and put them on the road to foreclosure.
While these circumstances may seem extreme - a perfect storm of bad luck - the basic economics of a hike in mortgage rates and a bank's inability or unwillingness to modify terms have been shared by many Americans over the past year.
The Goldricks took out a $375,000 (S$542,000) mortgage in 2005, when they refinanced a previous mortgage on their 1,800-square-foot (167-square-metre) house in semirural Hampton Bays, some 90 miles (150km) east of New York city.
At first, the interest rate was 6.5 per cent and the monthly payment was US$2,370. After two years, it rose to 9.5 per cent and suddenly the payment of US$3,850 was beyond the means of a family living off Mr Patrick Goldrick's salary as a cable guy.
Appraised at US$605,000 in 2005, the house today is surrounded by others with 'For Sale' signs out front and is probably worth less than the outstanding loan.
It is also the only home the Goldrick children have known.
'It's just walls. But this is where my daughter comes home after surgery, so they're comfortable walls,' Mrs Cynthia Goldrick said.
The loan was granted by Rose Mortgage Inc of New Jersey and is being serviced by Saxon Mortgage Services, a unit of Morgan Stanley.
But the mortgage is in the hands of neither because it was securitised, pooled with US$700 million worth of mortgages into an investment vehicle created by Morgan Stanley known as IXIS 2005-HE4, and sold to investors.
Such pools constitute much of the so-called toxic assets at the heart of the worst financial crisis in the United States since the 1930s.
Today's investors in IXIS 2005-HE4 include Prudential Insurance, Pimco Advisors, Western Asset Management and Legg Mason - institutions that manage money for the wealthy and the population at large.
Not just a house but a home
'We didn't jump on the refinancing bandwagon to take a cruise or buy a Mercedes,' Mrs Cynthia Goldrick said. 'We refinanced to give my child a life, not a lifestyle, but a life.'
The Goldricks' 10-year-old daughter, Erin, has had 10 operations for hydrocephalus, a Chiari malformation and spina bifida. Most of the medical bills are paid by insurance and a fund established from the settlement of a malpractice suit over Erin's treatment as a baby.
Erin is an honour student who would have made high honours but for a score of 83 in dance. She bears little outward sign of her medical history, unless she pulls up her hair to show scars on her neck and an open wound on her scalp. She looks after her little sister, Emily, 6, and their room is decorated by dozens of stuffed animals.
But her constant medical needs prevent Cynthia from going back to work. 'How can you go to work when your daughter's on the operating table?' Cynthia said.
At one point, the Goldricks considered selling their home and moving to a larger and cheaper one in North Carolina, but that would separate Erin from the doctors who have been treating her since she was 2.
So they enlisted the services of Mr Sal Pane, president of AmeriMod, a company specialising in modifying mortgages, a process in which banks agree to lower mortgage payments and interest rates to avoid the cost of foreclosures.
'Modifications can save this economy,' Mr Pane said. 'My company could do 60,000 loan modifications a month with our current staffing. Give us government assistance and I can modify the entire country in a year.' But modification efforts have encountered difficulties.
Increasingly, people are falling behind on loans that have already been modified and regulators warn the trend may worsen.
Of all the modifications made in the first quarter, 55 per cent were at least 30 days delinquent after six months, according to a government report.
Then there are the rights of bondholders - the financial institutions that invest in mortgage-backed securities like the pool that contains the Goldrick mortgage.
While modification advocates say it is better for investors to accept a lower rate of return rather than nothing, bondholders don't see much benefit if modifications just delay an inevitable foreclosure.
Moreover, some securitisations prohibit modifications, as is the case with the pool containing the Goldrick mortgage.
Such clauses are meant to protect bondholders - sometimes a hedge fund, sometimes a pension fund - who have been guaranteed a certain return.
So even though the Goldricks could afford to stay in their home if the interest rate was 6.5 per cent, and the bondholders would benefit by continuing to receive income on the loan rather than have it stuck in foreclosure, the servicer of the loan - Saxon - cannot budge.
'Your loan modification request has been denied because the investor does not allow modifications for this loan. We apologise for any inconvenience,' a Saxon customer service representative wrote to AmeriMod on Dec 19.
Saxon referred inquiries on the Goldrick mortgage to its parent, Morgan Stanley, which declined to comment.
Despite the notice, Mr Pane vowed to continue fighting to modify the loan, citing the extraordinary circumstances of the Goldrick family and a clerical error that put the Goldricks further into arrears when a payment to cover property taxes was credited to the wrong account.
Back in 2005, the securitisation pool containing the Goldrick mortgage looked like a safe bet for fixed-income investors. Fitch Ratings gave the senior debt in that pool a grade of AAA - a rating it maintains to this day - and Fitch said 80 per cent of the AAA bonds have been repaid in full.
The lower-rated debt in the pool has not fared as well, resulting in multiple downgrades.
Three years after the deal closed, 24.3 per cent of what is left in the fund is in foreclosure and another 13.1 per cent delinquent by at least 30 days, according to November data on Morgan Stanley's website.
And 2005 was still a pretty good year. Mortgage bonds from 2006 and 2007 are even more 'distressed'. Until the credit crisis blew up in 2007, Wall Street institutions were piling into mortgage-backed securities. It was dominated by Lehman Brothers, which has since collapsed, and Bear Stearns, which was sold to JPMorgan Chase & Co in an emergency deal.
Investment banks were making 1.25 to 1.35 per cent on securitisations, which would mean a profit of US$875,000 to US$945,000 on a US$700 million pool.
'That doesn't sound like a lot, but mortgage markets are so big there's a lot of profitability,' said Brad Hintz a securities industry analyst for Sanford C. Bernstein & Co.
Firms were in frenzied competition for market share at a time when mortgage companies were handing out easy credit.
Now, that bubble has burst and new issues of securitized mortgages have come to a halt. Investors are buying mortgage bonds at a steep discount on the secondary market.
'Distressed yields are on the order of 15 to 20 per cent, so people are kind of responding to that,' said JPMorgan analyst Chris Flanagan.
For example, Mr Whitney Tilson, founder of the hedge fund T2 Partners LLC, said he was betting that losses on underlying loans won't be as bad as the market expects. In other words, enough people will continue to make their mortgage payments.
'For the first time in our 10-year history we are buying distressed debt, and we are selling equities to do it,' Mr Tilson told the Reuters Investment Outlook Summit earlier this month.
But that won't help the Goldricks, who like many other families are in danger of losing their house and not likely to benefit from the US$700 billion that Congress has allocated to Wall Street for bailing out financial institutions.
'I am absolutely bitter,' said Mr Patrick Goldrick, who sees the scandal surrounding investment advisor Bernard Madoff as further evidence of Wall Street wrongdoing.
'I am bitter towards Congress and bitter towards the big banks and the creepy billionaires who get away with stealing pensions.
'I just don't even listen anymore. I turn it off. It's all bad news.' -- REUTERS
[A case study of the families affected by the financial crisis.]