A real Goldman Sachs scandal

By Felix Salmon
May 19, 2010
"vampire squid" article about Goldman Sachs, people accused him of throwing everything and the kitchen sink at the company; today's broadside from the NYT feels similar. It's basically the same story, repeated many times: Goldman had clients who were invested in X going up, and yet at the same time Goldman had investments which would benefit from X going down.


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When Matt Taibbi published his famous “vampire squid” article about Goldman Sachs, people accused him of throwing everything and the kitchen sink at the company; today’s broadside from the NYT feels similar. It’s basically the same story, repeated many times: Goldman had clients who were invested in X going up, and yet at the same time Goldman had investments which would benefit from X going down.

The fact is that Goldman Sachs is an intermediary which hedges its positions and which, as a broker-dealer, will naturally be taking long and short positions in all manner of different securities at different times. This should not be a scandal at all.

On the other hand, it really would be a scandal if Goldman Sachs was deliberately and unnecessarily kicking people out of their homes, even when doing so would lose it money. And that seems to be what it’s doing in one case in Ohio.

You might recall American Homeowner Preservation, a company I wrote about last month. The idea behind their business is that they negotiate a short-sale with the bank holding a mortgage, find an investor to buy the house in question, and then lease the house back to the original homeowner, who has an option to buy it back, at a fraction of the original mortgage payments.

It’s an idea which makes a lot of sense — but which Goldman Sachs seems to have problems with. AHP’s principal, Jorge Newberry, explains:

Struggling to stay in their home of 18-years, a Windham, Ohio family is desperately trying to solve their crisis before a May 24th sheriff’s sale. Suffering from reduced income and an ever-escalating adjustable payment, the family contacted their servicer Litton Loan Servicing to obtain a loan modification, which was eventually denied. The family then contacted American Homeowner Preservation, who made an offer to purchase the home at the appraised value of $43,000. With AHP, the family would receive an affordable 5-year lease to stay in the home, plus a favorable 5-year option to repurchase…

Last week, Litton indicated that they will approve the Windham, Ohio family’s short sale, but only if the family vacates the home due to an internal policy which restricts short sales in which the purchaser provides leases and/or options to the selling families.

Litton, of course, is owned by Goldman Sachs. And right now it seems that the house will go to auction on Monday with an opening bid of $45,300, and there will almost certainly be no bids at that level. Litton will then buy the house for $45,300, and, following the standard loan-servicer playbook, will start eviction proceedings against the family in question. Once the family is homeless and the home is vacant, Litton will try to sell the home — but there are lots of vacant homes in this particular part of Ohio, and the home is realistically just going to deteriorate steadily in terms of its condition and its value. Litton, if it ends up being able to sell the home at all, will surely get less than $43,000 for it — and will have to pay a large amount of money in legal fees on top.

So why isn’t Litton accepting AHP’s offer? In a bull market, it makes sense to be wary of short sales which aren’t bona fide arm’s-length transactions, but right now it’s undeniably better for all concerned to keep the current occupants in their home. And indeed AHP has dealt successfully with Litton in the past. What’s more, Goldman Sachs spokesman Michael DuVally told me that “Litton has no such policy that requires borrowers to vacate”.

It’s true that under the latest iteration of the Home Affordable Foreclosure Alternative Program, or HAFA, short sales must be arm’s-length transactions. But this isn’t a HAFA sale, and in any case the servicer always has the option of deleting the bit of the arm’s-length language which prevents the seller from renting their home back from the buyer.

I tried calling Ceci Oliveira, of the Litton short-sale department, the person who told Newberry about the Litton policy; she didn’t get back to me, so it’s all a bit unclear whether this Litton policy exists or not, and if it exists, why it exists.

My hope is that if Litton doesn’t see sense and agree to the short sale before Monday, at the very least they’ll hold off on eviction proceedings once they take title to the house. After all, there’s really no reason for them to evict: right now, in this part of Ohio, an empty home is not more valuable than one without people perfectly willing to make regular lease payments. Instead, it just falls in value over time.

I’m going to try to keep an eye on this case — and I have to admit to a tiny bit of hope that now it’s being publicized, Litton/Goldman is going to do the right thing, for themselves and for the owners of the home, and allow this family to stay where they are. But if they don’t, and choose instead to lose money by evicting the family in question, they deserve all the opprobrium that the NYT is trying to drum up today.

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