SAN JOSE -- When wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.
The couple 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 Sachs 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 Sachs finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers.
The couple allege that Goldman Sachs declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman Sachs' then-Chief Executive Henry Paulson, later U.S. Treasury secretary, in 2003.
Unable to identify a lender, the couple could not capitalize on a mortgage hardship provision that would allow them to defer some payments, or on a state law enabling them to offset their debt against separate, investment-related claims against Goldman Sachs.
In July, the Beckers won a David-versus-Goliath struggle when Goldman Sachs 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 Sachs, better known for sending top officers such as Paulson to serve in high-level Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers.
Goldman Sachs spokesman Michael DuVally declined to comment on individual cases or on the firm's new role in Bankruptcy Court.
Joining other Wall Street firms that bought millions of subprime mortgages, Goldman Sachs companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower- income people who couldn't keep up with their loans' soaring monthly payments.
Millions in trouble
Some borrowers were speculators or home buyers 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 fast-talking 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.
Now, millions of these borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds' value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and the seller or the lender takes a loss.
The Beckers charged that in their case, Goldman Sachs engaged in years of obfuscation and resistance.
"In Bankruptcy Court, they tried to portray us as incompetent or deadbeats," said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them.
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 $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.
Tony Becker, an engineer, took short-term contract jobs amid the technology bust. Celia 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.
Layers of denials
When she wrote to Paulson, however, lawyers for Goldman Sachs denied that it owned the Beckers' mortgages. So did Germany's Deutsche Bank, a trustee that was holding thousands of subprime mortgages Goldman Sachs 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 Sachs 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 Sachs 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 Sachs had bought the mortgages. Then, when a lawyer for MTGLQ Investors 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 Sachs, telling the attorney that he hates "spin." The lawyer acknowledged that MTGLQ was a Goldman Sachs affiliate.
That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman Sachs that's housed at the company's headquarters at 85 Broad St. 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 Sachs dropped its claims for $626,000, far more than the couple's original $356,000 in mortgages and $70,000 in missed payments.
The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.
That lowered the monthly payment to $1,900, less than half the maximum $4,000 a month their subprime loans could have demanded.
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.
"I take solace," Tony Becker said, "in knowing that I was up against the worst possible opponent -- the biggest, strongest investment bank in the world."
McClatchy Newspapers researcher Tish Wells contributed to this report.