St. John exposed>Edwards, Foreclosure Critic, Has
Investing Tie to Subprime Lenders
By CHRISTOPHER COOPER
August 17, 2007
As a presidential candidate, Democrat John Edwards has regularly attacked subprime lenders, particularly those that have filed foreclosure suits against victims of Hurricane Katrina. But as an investor, Mr. Edwards has ties to lenders foreclosing on Katrina victims.
The Wall Street Journal has identified 34 New Orleans homes whose owners have faced foreclosure suits from subprime-lending units of Fortress Investment Group LLC. Mr. Edwards has about $16 million invested in Fortress funds, according to a campaign aide who confirmed a more general Federal Election Commission report. Mr. Edwards worked for Fortress, a publicly held private-equity fund, from late 2005 through 2006.
ON PREDATORY LENDING
Some of John Edwards's statements in recent months on predatory lending
"Will you stand up to end poverty in America? It means addressing education, jobs, health care, housing, predatory lending, and personal responsibility. The fight will be long and it will not be easy. Are you ready?"
-- Feb. 2, 2007, to the DNC Winter Meeting
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"While Washington turns a blind eye, irresponsible lenders are pulling a fast one on hard-working homeowners,'' Mr. Edwards said a few days later. ... It's time to put an end to the shameful lending practices that are compromising our strength as a nation."
-- April 4, 2007, in Davenport, Iowa
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"I said, 'This is not okay that this is happening.' I don't know how many cases there are . . . but the right thing is to go back and fix this."
-- May 11, 2007, to the Washington Post, explaining his reaction when he found out that Green Tree had foreclosed on Katrina victims
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"In Cleveland this morning, I saw something that would absolutely break your heart. ... In a one-block radius, 38 homes have been foreclosed. ... What I saw first-hand this morning in Cleveland is a perfect example of why we have got to have a national predatory lending law."
-- July 17, 2007, in Pittsburgh, on his Road to One America tour
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"We have a housing crisis on our hands. It's time for the president to show real leadership and stop protecting irresponsible lenders. Because of President Bush's failures, millions of American families are at risk of losing their home and everything they've worked for. The president must stop blaming homeowners, and wake up and realize that our nation's economy has been put at severe risk by irresponsible corporations."
-- Aug. 10, 2007, in response to Bush's comments on the housing market
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Read more about the candidate's opinions of predatory lending at Mr. Edwards's campaign site.Asked about the matter, Mr. Edwards yesterday pledged that he would personally provide financial assistance to New Orleanians who are facing foreclosure by Fortress-affiliated businesses or have lost their homes already. "I intend to help these people," the former North Carolina senator said.
He also promised to cleanse his portfolio of any investments that may be profiting from their losses. "I am going to divest" from any Fortress funds that have a stake in the subprime lenders that filed the foreclosures, he said in a telephone interview. "I will not have my family's money invested in these firms."
Mr. Edwards didn't give details on how or when he was going to proceed, either to alter his holdings or to aid borrowers. He said he plans to begin making amends to New Orleans homeowners first by contacting them and "seeing where they are in the process." He said his help may come from his own cash or in collaboration with a charity that specializes in repairing homes. The foreclosures, Mr. Edwards said, "run counter to what I'm about."
On the campaign trail, Mr. Edwards has particularly attacked lenders behind foreclosures in storm-slammed Louisiana. In April, he visited the devastated Lower Ninth Ward neighborhood to voice one of his main antipoverty planks: a proposal to rein in subprime-mortgage companies whose "shameful lending practices," he said, threaten millions of working-class homeowners. "While Washington turns a blind eye, irresponsible lenders are pulling a fast one on hard-working homeowners," Mr. Edwards said a few days later.
At the time in late 2005 when Mr. Edwards went to work for Fortress, it already had a stake in one subprime lender that subsequently foreclosed on some Katrina victims, Green Tree Servicing LLC. While he was there, Fortress acquired a second, Nationstar Mortgage LLC. Fortress paid Mr. Edwards $479,512 in 2006 for part-time work, a Federal Election Commission report in May showed.
After leaving the firm, he kept about half of his net worth in Fortress funds. And Fortress employees have collectively made up the largest class of political contributors to Mr. Edwards. Workers there put up more than $150,000 toward his presidential run in the first six months of the year.
This isn't the first time Mr. Edwards has been confronted with the possibility that Fortress-directed companies might be foreclosing on New Orleans homeowners. In May, the Washington Post said that shortly after Katrina hit, Green Tree sent a letter to a 67-year-old storm victim, admonishing her to get current on her mortgage or face losing her house. At the time, most mortgage companies doing business in the city had agreed to a house-payment holiday for storm victims.
"This is not okay that this is happening," the Post quoted Mr. Edwards as saying. He added that he planned to speak to the lender about its practices.
Yesterday, Mr. Edwards said he did later speak to Fortress about Green Tree and was told the matter had been taken care of. At the time, Mr. Edwards said yesterday, he didn't know how many foreclosures Green Tree might have filed in New Orleans. The Post didn't ask him about Nationstar's activities in New Orleans, and he said yesterday that he was unaware that that lender was also pursuing foreclosures there.
LOAN COVENANT
• The News: Presidential candidate John Edwards may have benefited indirectly from lenders foreclosing on Hurricane Katrina victims because of his holdings in Fortress Investments.
• Behind the Debate: Democrat Edwards has been a leading critic of subprime lenders and the wave of foreclosures, especially in hard-hit Louisiana, in the credit crunch. His Fortress holdings stem from his stint at the firm in 2005-06.
• The Bottom Line: Mr. Edwards says he will get rid of the investments and will personally provide financial assistance to New Orleans families who have lost their homes in Fortress-related foreclosures.The candidate has said he had no involvement in Fortress units' subprime lending when he worked for the private-equity firm and wasn't aware of it at the time. He has said his job at Fortress was to provide information about what he saw happening economically in the U.S. and overseas. He has also said he was there "primarily to learn" about finance.
In the interview yesterday, Mr. Edwards said that when he first joined Fortress, "I made clear that I didn't want to have anything I was investing in to be antilabor or involved in predatory lending practices." But he added that he didn't fully understand the firm's complex operations, saying: "They're diverse. They're very diverse."
One Green Tree New Orleans foreclosure involved the wood-frame house of Eva and Bailey Comadore, not far from where Mr. Edwards visited in April, a home Katrina struck two years ago. Mrs. Comadore, a 65-year-old former barkeep, now shares a trailer outside the city with her daughter and two children. Her 73-year-old husband, a former tire repairman, lives nearby. Their Ninth Ward house was sold at a foreclosure auction in May to Green Tree for $10,000 to settle a $53,000 mortgage that carried a 13% rate of interest.
Read Mr. Edwards's most recent personal-finance disclosure, filed with the Federal Election Commission in May."The mortgage company wouldn't give us a chance to catch up," says Mrs. Comadore.
After a call was placed to Green Tree's Minnesota headquarters, a person who identified himself as an official of the company, but wouldn't give a name or call-back number, said he planned to confer with colleagues before making a comment. As of last evening, he hadn't called back.
Fortress itself declined to comment. Nationstar, as of last evening, hadn't returned calls.
Edwards aides, while apologetic for the foreclosures, defended subprime lending in general. They pointed out the distinctions between subprime loans, which are extended to people with less-than-stellar credit, and "predatory" loans, which often target the same consumers but employ pressure sales tactics and punitive covenants that can strip equity from home buyers and tie them to onerous payments. Subprime loans, defenders note, can benefit many lower-income people previously locked out of home ownership.
Mortgage experts say there's no clear line dividing standard subprime loans from "predatory" ones. Generally speaking, said Thomas Lawler, a former official at mortgage buyer Fannie Mae, predatory loans carry high interest rates that are allowed to rise but not drop. They may be loaded with prepaid fees. Lenders may make monthly payments look smaller than they really are by not requiring borrowers to put taxes and insurance in escrow. And the loans generally don't allow early payoff without a steep penalty. That bars refinancing if interest rates drop.
A review of some courthouse records in Louisiana shows that Green Tree and Nationstar mortgages carry many of those attributes. Several carry accelerators that allow the already-above-market initial interest rate to nearly double. They also carry penalties for early payoff.
Mr. Edwards is hardly the only presidential candidate to field criticism over his business. Republican Mitt Romney has come under attack for his time at Bain Capital, a private-equity firm that has purchased companies and forced layoffs. He and Mr. Edwards, along with Illinois Democratic Sen. Barack Obama, have taken hits for investing in companies that did business in Sudan. Republican Rudy Giuliani has fielded criticism for his consulting company's or his law firm's associations with troubled businesses and with Venezuela, whose socialist leader harshly criticizes the U.S.
Mr. Edwards has based his campaign heavily on helping poor and working-class people, and attacking companies he says hurt them. In July, he went on a three-day poverty tour of desperate neighborhoods. It began in the front yard of a renovated home in the Lower Ninth Ward of New Orleans, near the Comadore residence. The populist candidate, who runs third in most Democratic polls, has drawn cheers from labor leaders and reaped the support of his party's more liberal wing.
Near the close of the poverty tour, Mr. Edwards traveled to a Cleveland neighborhood that has a high foreclosure rate. "This is wrong. This is not complicated, it is wrong," he said, as he walked along. "These people have been taken advantage of." Records show the county Sheriff's Office has scheduled three foreclosure auctions at the behest of Nationstar in August and one for Green Tree.
In Louisiana, Ernest Grant, a painter, and his wife, Ollie, a nurse, have tried for months to repair their Katrina-hit ranch home, while taking refuge in Texas. The Grants are unemployed and facing foreclosure from Nationstar on a $107,000 adjustable-rate loan. "They just called us one day and said we needed to pay $18,000 or they were going to take the house," Mr. Grant said. He said he got an insurance settlement of "about 12 grand." But "it wasn't enough. Our house was totaled."
The Grants await help from a federal rebuilding program called Road Home that gives owners up to $150,000 to repair houses. Homeowners become ineligible for grants if they lose their houses in a foreclosure.
Traveling occasionally to New Orleans, Mr. Grant has gutted the house and laid a new tile floor. He has put the home on the market. But with an asking price of $130,000, about what it takes to pay off the mortgage and sales commissions, it may be overpriced.
Fortress began its move into subprime lending before Mr. Edwards joined, buying Conseco Finance Servicing Corp. out of bankruptcy in 2003 and renaming it Green Tree.
In July 2006, 10 months after Mr. Edwards joined Fortress, it bought Centex Home Equity Co. of Dallas, one of the country's largest subprime lenders, renaming it Nationstar. In December, just as Mr. Edwards was leaving Fortress, Nationstar bought the loan-origination division of subprime lender Champion Mortgage. This March, after Mr. Edwards had left and a month after Fortress went public, Fortress bought $4 billion worth of subprime mortgages from Fremont General for 97 cents on the dollar.
In April, with the subprime mortgage market beginning to crater, Fortress went bargain-hunting. It used Newcastle Investment Corp., a real-estate investment trust it manages and partly owns, to purchase $1.3 billion of subprime loans at a deep discount. Fortress's chairman and chief executive, Wesley Edens, is also the chairman of Newcastle. Fortress handles daily operations for a fee and possible bonuses, and holds approximately 6.6 million shares of stock and options in the REIT, Securities and Exchange Commission records show. Nationstar services Newcastle's subprime portfolio.
Fortress owns Green Tree jointly with Cerberus Capital Management LP, another private-equity firm. The percentage of its ownership isn't public. Fortress recently said it would be selling its stake in Green Tree to a consortium that included Green Tree's management and another private-equity fund, Centerbridge Partners.
In the Lower Ninth Ward of New Orleans, Nationstar has filed a pair of lawsuits on a street called Egania. One foreclosure action is levied on a house owned by Dilton Robinson, a retired longshoreman. Soaked by floodwaters, it is uninhabitable. Mr. Robinson said he's hard-pressed to do repairs on the property, a rental, which may eventually be eligible for federal reconstruction money.
In lieu of seizure, Mr. Robinson said, Nationstar is demanding he pay $400 a month. He said his only income is $1,200 a month from Social Security. When he received a $3,000 insurance settlement, Nationstar took that as well, he said. As did the other homeowners, he said his insurance settlement was nowhere close to what was needed to repair his property.
Mr. Robinson also owns the house next door at 1017 Egania, a similar property in similar condition that carries a $70,000 subprime mortgage held by a Nationstar competitor. Although Mr. Robinson isn't keeping up with that mortgage either, the company has not filed a foreclosure suit, civil-court records show. Instead, Mr. Robinson said, the company plans to put a lien on the property, which will require Mr. Robinson to pay off the mortgage should he ever decide to sell. "That's a big help,'' he says.< |
