By Steve Weinstein
By Devon Maloney
By Tessa Stuart
By Alison Flowers
By Albert Samaha
By Jesse Jarnow
By Eric Tsetsi
By Raillan Brooks
In other words, it wasn't his fault.
But the truth is that Lehman's fall in the subprime-mortgage crisis was a man-made disaster. The white-shoe firm was not just deeply involved in the murky subprime-mortgage market; Lehman and the other dominant Wall Street investment banks, experts tell the Voice, actually created the demand for the mortgages that they would then package and swap for enormous returns. Addicted to the profits that such securities brought in, Lehman was desperate for the risky mortgages they required.
"Sure, there were sleazy brokers out there who were fooling people, but you have to understand—to use a drug analogy—they are like the 'corner boys,' " says Irv Ackelsberg, a Philadelphia lawyer who specializes in representing homeowners in foreclosure cases. "You have to look at the cartel at the top. The brokers were basically creating loans that had been ordered by Wall Street."
Put another way, Lehman and other top financial firms "primed the pump and controlled production," says Kevin Byers, an Atlanta forensic accountant who has spent years tracing the evolution of the subprime market.
"Lehman was very early in getting this deal machine into place," he says. "With one hand, they loaned the money to the mortgage lender to allow them to originate loans to home buyers. With the other hand, they ostensibly bought the loans originated with their line of credit, and resold them as securities to investors."
The scheme worked like this: Homeowners signed mortgages with loan companies. Lehman bought those mortgages and bundled them into "tranches," which they then sold to investors—often large pension funds and other financial institutions.
Jay Weiser, an associate professor of law and real estate at Baruch College, says the system was set up to assure the owners of the mortgage-backed securities that they would get a steady return. "Since everyone at the top was paid for how many mortgage-backed securities they put out each year, they had every incentive to look the other way and overstate the quality of the loans they were making," he says.
The subprime-mortgage market grew from $40 billion in 1994 to $600 billion in 2005. On the plus side, the securities offered rich and institutional investors a steady rate of return. That was true, of course, only if the mortgages were solid.
In fact, loan companies—especially the shadier ones—were issuing home loans to people who really couldn't afford them, or under terms that basically guaranteed the buyer would default once the interest rates soared.
Like most streetwise dealers, Lehman took a cut of just about every piece of the transaction all the way down the line. It (and other Wall Street firms) ended up pushing its loan companies to stretch even their flimsy standards and issue weak loans.
"Lehman was involved at all ends of this dirty business, so deeply involved that it set up shop at every single money-making stage," Ackelsberg says. "Basically, it was just a gold rush: a huge wealth transfer from middle-class families to Wall Street."
And it was a sweet proposition while it lasted. But like any racket, the subprime business had its seamier side. And for that, Lehman kept its squeaky-clean image by turning to a less holy subsidiary.
Call her Aurora.
When the mortgage market collapsed and the huge investment bank failed last month, it dragged other financial markets down with it. Lehman's executives walked away with buckets of cash.
But buried beneath the bank, way down at the bottom of the pile, are people like Brooklyn lawyer Philip Grant and Bart Christofferson, an excavator in Utah. They live 2,000 miles apart, but they have one thing in common: They were both worked over by a Lehman Brothers subsidiary called Aurora Loan Services.
Grant's story is that he got a little behind on his payments for a house in Brooklyn. When he sent in the checks that would catch him up, the Lehman subsidiary, Aurora, refused to accept the money and instead moved forward with a foreclosure. He lost the house and millions in future real estate appreciation.
Christofferson, meanwhile, says he could not make his payments because his tenant could not make the rent. So he went out and found buyers for the house, but he says the same Lehman subsidiary did nothing. He had to let the house fall into foreclosure. If he didn't, he would have lost everything.
In the epic tale that is the collapse of Lehman, Grant and Christofferson are two minor players, but they represent regular folks around the country who were burned by the Wall Street firm's financial practices. In the turmoil that has befallen the financial markets, however, the stories of people like Grant and Christofferson have been overlooked.
Such stories put the lie to Lehman's claim that it was committed to the "highest ethical standards," that there was a "Lehman Brothers standard" that set the firm above all others. Jonathan Doorley, a spokesman for Lehman Brothers Holdings, declined to comment on the firm's role in the mortgage crisis. He referred questions on Aurora to the Aurora headquarters in Colorado. Deborah Munies, an Aurora spokeswoman, did not return phone calls for comment.
Founded 158 years ago by two Alabama cotton traders, Lehman Brothers essentially focused on bond trading for much of its history, and built a reputation as the ultimate white-shoe financial firm: untouchable, a Wall Street flagship, and an engine of the city's economy.
The company had an entire office that just handed out charitable donations each year to dozens of nonprofits here and abroad, including $5 million to the World Trade Center Memorial Foundation and $1 million to the Apollo Theater in Harlem. In 2007, employees donated $4.6 million, with the company matching those gifts, dollar for dollar. The company even had its own art curator.
Lehman won major business awards each year. Lehman was named the "most admired" securities firm in 2007. And this year, somehow, Business Week named Lehman one of the 50 best-performing companies in 2008.
Lehman's boss, Fuld, collected a number of society honors, including a 2006 Rockefeller Award from the Museum of Modern Art.
Named CEO in 1994, Fuld doubled the number of employees in the firm and led it through an impressive increase in revenue and stock value.
And, predictably, he became very rich. In testimony last month, he told the House Oversight Committee that he had made $60 million, plus another $240 million in stock that he sold. He owns a $21 million apartment in New York City, a $14 million home in Florida, a summer home in Idaho, and millions in artwork.
Fuld also waded heavily into the business of selling mortgage-backed securities to investors. You could argue that Lehman's growth precisely paralleled its increasing involvement in those types of investments.
Lehman was able to broaden its portfolio following the repeal of the Glass-Steagall Act in 1999, during the Clinton administration. The act prevented banks from investing on Wall Street, thus shielding consumers from riskier transactions. Once that protection was gone, Lehman could gamble away, and it became among the largest issuers of mortgage-backed securities. The share price had soared from its 1994 price of $5 to $86 in 2007.
Now that Lehman's stock is nearly worthless, several of the pension funds that lost their shirts investing in the mortgage-backed securities have sued Lehman for misrepresenting its financial position as things went sour.
A complaint filed by the pension fund of plasterers' union, Local 262, quotes a memorable bit of obfuscation from a Lehman spokesperson back in July 2007, when things had already started to go bad: "Rumors related to subprime exposure are unfounded."
"They were not telling the truth with regard to their exposure," says Local 262 attorney Curtis Trinko. "They were leading the investment world to believe that they were not exposed, while certain people in charge of those kind of investments had really gone deeply into it."
Representative Henry Waxman called Lehman "a company in which there was no accountability for failure." Four days before the bankruptcy, Waxman said, the Lehman board gave three executives $20 million bonuses.
Federal investigators recently issued subpoenas to a range of Lehman executives and divisions, as part of an investigation into whether the company misled investors during the year leading up to its collapse.
The demise of Lehman Brothers led predictably to a series of gauzy images: employees carting off their stuff; people mourning sentimentally about the company-that-was; nonprofits bemoaning the demise of a major sugar daddy; Fuld insisting that his tenure had been successful, and fulminating about the failure of the government to bail him out.
Even in the late '90s, however, the company was underwriting loans issued by questionable lenders. The company did a lot of the underwriting early on for loans issued by two of the more notorious lenders, Delta Funding Corp. and FAMCO, according to Josh Zinner, a lawyer with the Neighborhood Economic Development Advocacy Project.
The U.S. Justice Department sued Delta Funding in 2000 under the Fair Housing Act for a range of illegal behavior, which included charging unfairly large fees and penalties to homeowners, handing out kickbacks, and charging African-American homeowners more than whites.
In 2003, a federal jury in California held Lehman liable for helping FAMCO cheat borrowers. The jury ruled that Lehman not only knew about the fraud, but actually assisted the company in deceiving homebuyers. The jury fined FAMCO and Lehman $51 million.
Lehman also worked with United Companies Lending, which pushed scores of people toward foreclosure, especially in Philadelphia. United was investigated by federal and state authorities in Pennsylvania and Massachusetts for questionable lending practices.
Lehman was also involved with the mortgage insurance company Conseco, which was fined $27 million in 2002 for violating consumer-protection laws. In 2004, Conseco had to pay $20 million to settle an improper securities-trading case brought by the New York Attorney General and the SEC.
Lehman purchased BNC Mortgage, which gave Lehman a subsidiary that directly lent to homebuyers. And Lehman purchased the troubled Delaware Savings Bank in 1999 and changed its name to Lehman Brothers Bank. Delaware Savings had specialized in lending to homebuyers and purchasing mortgage loans.
Lehman also owned one of the largest loan-servicing companies that collect mortgage payments—the very same Aurora Loan Services that foreclosed on Grant and Christofferson.
Most folks believe that Lehman simply collected mortgages in one pot and then sold them to investors. But according to Ackelsberg, Lehman created the pot first and then went out looking for mortgages to fill it. In other words, the demand was coming from Wall Street.
"When they did a securitization and registered it, they were creating a structure that would hold mortgages that hadn't been made yet or purchased yet," Ackelsberg says.
Because Lehman needed loans quick, then, brokers were more willing to set up loans with people who were in the financial margins, he says.
And there was no incentive to take the long view, Weiser says. "Everyone in the whole system, from the homeowner to the CEO of Lehman, was rewarded on short-term performance, rather than on whether or not these loans would survive over the long term," he says.
According to Zinner, the system rested on a shaky foundation. "Although these securitization trusts were based on many unaffordable and unsustainable mortgages, it didn't crumble right away because the companies were gouging so much out of the consumer, they still had a high rate of return," he says. "The drop in housing prices gave it the final push."
The foreclosure letter that went to Philip Grant came from Lehman subsidiary, Aurora Loan Services.
Lehman purchased Aurora in 1997 and moved its headquarters from Nebraska to Colorado. Once in the Lehman stable, Aurora rapidly expanded its portfolio and eventually held an $80 billion mortgage portfolio, making it one of the largest loan-servicing companies in the country.
Aurora was also one of the largest loan originators, meaning that some portion of the bad loans, which led to Lehman's downfall, were issued by its own subsidiary.
Aurora officials recently put up a statement on its website, declaring the company was not part of the Lehman Brothers bankruptcy. "There are no changes to the way we service your loan or do business with you," the company says, next to a photo of a white couple in a majestic home. (In the wake of Lehman's collapse, Aurora is now for sale and is considered one of Lehman's better assets.)
Elsewhere on the website, the company says: "Please remember that we are here to listen to your situation and help you understand your options." The site claims: "Aurora will work with you to assess your current financial situation and partner with you to outline the best program to help you resolve the situation."
And: "We routinely work with customers who are having difficulty in making their mortgage payments to explore alternatives to foreclosure that would enable them to stay in the home."
Despite these rosy assertions, an industry survey in 2007 by Moody's found that companies like Aurora were only modifying a tiny percentage of their loans. The Center for Responsible Lending reported in January that foreclosures were outstripping modifications by 7 to 1, and 13 to 1 among subprime loans.
The Center for Responsible Lending wrote in 2007 that the sheer magnitude of the problem may have overwhelmed servicers like Aurora. In addition, their parent companies may have been cutting back just at the time that they needed extra staff to handle the demand. Plus, it cost them money to do a modification.
In federal courts around the country, people like Grant are suing Aurora, alleging that the company acted improperly in foreclosing on their homes. And Internet bulletin boards are thick with irate complaints about the company.
The letter that Aurora sent to Grant said he was behind on his payments, and the company was going to foreclose on his four-family house in Bed-Stuy.
Grant was indeed behind—but only by a few weeks, he says. Moreover, he had already mailed in the payments that would bring him up to date.
He contacted Aurora to plead his case, but, incredibly, the company refused to accept the payments. Instead, company officials moved ahead with the foreclosure. No matter what he did, Grant says, Aurora would not work with him to resolve the debt.
"I had the money, and I sent them the money, but they didn't want it," he says. "It's like they would rather have had the house back."
Grant tried to contact Aurora, but he was passed from one voice mailbox to another. He then wrote a letter. "It was impossible to speak with a real person," he says.
Grant's initial move was to complain to the Office of Thrift Supervision. "They did absolutely nothing," he says. "I got a letter back basically saying, 'You better cooperate with whatever they say.' "
Grant, though, took it to a judge, who immediately tossed the case because Aurora did not hold title.
Aurora then purchased the title from Lehman Brothers for $10 and initiated another foreclosure action.
"There were four or five court dates, but they just dragged it along," Grant says. "It was all about a contrived default. They seem to be in the business of foreclosing on people."
Grant started writing to Lehman directly, hoping for a resolution. Lehman simply forwarded the letters to Aurora. Eventually, Grant sued in federal court. The case is pending.
Aurora filed foreclosure lawsuits against just two Brooklyn homeowners in 2005. So far this year, the firm has sued 90 homeowners in the borough, court records show.
In Lehigh, Utah, Christofferson, the excavator with three kids, says that he didn't even hear the name "Lehman Brothers" until after the house he owned was taken from him by Aurora.
Lehman, he says, owned the note, but hired another company to service the loan. That company, in turn, passed the servicing job to Aurora.
Christofferson was so upset by the way he was treated that without hiring a lawyer, he filed a lawsuit against Aurora and Lehman Brothers in federal court in Utah.
Christofferson says he bought the house with a mortgage, and leased it to a tenant. The tenant developed cancer and could not keep up with the rent payments, which in turn forced Christofferson to fall behind on his mortgage payments.
"The cancer annihilated the guy, and I couldn't just kick him out into the street," he says. "So I decided to try to find another buyer."
Christofferson says he went out and actually found potential buyers. The buyers wanted to know what the bank, Lehman Brothers, would accept. When he got a bottom-line price from Aurora, he returned to the potential buyers and obtained bids at that level.
He went back to Aurora, but instead of green-lighting the sale, the company just sat on its hands and forced Christofferson to let the house go into foreclosure. He couldn't keep up with the payments, and the company wouldn't work with him to help him catch up, he says.
"My good-faith efforts were shoved aside," he says. "Technically, the house now belongs to Aurora. I took foreclosure rather than destroy myself, which is what they were asking me to do. The school of hard knocks is a good teacher."
Christofferson, however, has more questions about what transpired. "It didn't matter to them whether I caught up with the payments or not," he says. "There are a lot of things that don't sit right with me about the whole thing."
Mike Miller, a Virginia lawyer who represents homeowners in foreclosure cases, says that typically, Lehman turned to Aurora when the interest rate on a given loan jumped from the low "teaser" interest rate that results from an adjustable-rate mortgage instead of a safer fixed rate.
"They dump it off on Aurora as a way to clean their hands, and then Aurora becomes the debt collector," Miller says. "But behind the scenes, Lehman still retains an interest. People try to get a loan modified in some way, and the company won't talk to them. They roll right over them."
While the Office of Thrift Supervision collects complaints about companies like Lehman and Aurora, the office does not allow the public to review those complaints. The agency would not even tell the Voice how many complaints had been received about Lehman and Aurora.
But Thomas Martin, the head of a Washington, D.C.–based company that does investment analysis and has been monitoring Lehman and Aurora over the past three years, says he has received more than 400 consumer complaints from around the country about the two firms. He believes that the Justice Department should investigate Aurora for its loan practices—just like the FBI is investigating Lehman for misleading investors on its financial position in the months before the collapse.
"To us, it may have been a criminal enterprise from the get-go," says Martin, whose group is called America's Watchdog. "They are playing with both ends of the bat. They collect fees from the pension funds, which buy these mortgage-backed securities, and then gouge the consumer on the back end. I think Aurora should be put out of business, and they weren't the only loan servicer doing this stuff."
Martin says Aurora does a series of questionable things, which result in unfair payments and push consumers toward foreclosure. For one, consumers complain that the company posts on-time mortgage payments late, he says. That has the effect of leaving an impression in the records that the borrower was late when he was not.
"It's in their interest to extort more money out of the consumer," Martin says.
So why was it that Aurora wasn't interested in working with Grant and Christofferson? According to Byers, the Atlanta forensic accountant, the ideal loan is one that is still performing, but is often late—not a loan that goes into foreclosure. That's because late payments generate late fees and other costs, which go to the servicing company.
According to a former mortgage company official, who spoke with the Voice on condition of anonymity, Aurora was motivated to foreclose because its allegiance was more to the investor who bought the securities than to the homeowner.
And it was the investor who set the terms. "The rules varied, depending on what the investor wanted," he says. "You could have an investor who said, 'We don't want you to do any modifications,' and the servicer would be contractually obligated to foreclose under those terms."
More than likely, he says, if there was still value in the home, then a foreclosure made more economic sense. "If they saw that they were going to make some money, the easiest thing to do is take the property and try to resell it," he says.
The Voice found a range of other people who had their own unsettling stories to share about Aurora and Lehman. In Newark, New Jersey, Martha Rodriguez says that she bought a two-apartment building on a subprime mortgage. Incredibly, Rodriguez was able to get the mortgage even though she was out on disability.
Once Rodriguez fell behind, Aurora initially promised to work out a payment plan of some kind. But it turned out that the plan was simply to take the house back from her. "The only thing I got from them was the letter of foreclosure," says Rodriguez, 49.
She tried to put together a payment plan and scrounged up enough money to make a substantial payment. But Aurora would not accept the payment.
"They started billing me for penalties and interest, but never gave me a payment plan," she says.
Today, the building is in Aurora's hands. "It's messed up my credit, and my life," she says. "There's a lot of things I couldn't do because of it."
Suzanne McLaughlin, a 37-year-old computer programmer from Melbourne, Florida, didn't lose her townhouse, but she says Aurora put a terrible scare into her earlier this year in a Kafka-esque dispute over whether she had homeowner's insurance—which she did.
McLaughlin says the ordeal began when Aurora wrote her, claiming she had no proof of insurance. She faxed the proof to the company, but the company next told her she had failed to provide proof and threatened to bill her for a $53,000 insurance premium.
She called them and faxed the proof at least two more times, she says. But Aurora kept sending her demands for proof, and finally sent her a formal bill for the $53,000.
McLaughlin was paying $175 a month for homeowner's insurance, and she says Aurora's demand was ludicrous.
"I've never been late on a mortgage payment, so I didn't even concern myself with it," she says. "I thought it was a billing oversight, until I realized it's not going away."
McLaughlin got nervous. She had heard stories about Aurora taking money that was supposed to be applied to mortgage payments and applying it to penalties and other murky costs—like this insurance demand. She called the company repeatedly. She kept getting different people on the phone. No one would give her a last name.
Finally, she got her insurance agent and a local newspaper reporter to make calls on her behalf. Only then did the company finally confirm to her that she had provided proof of insurance.
"Knowing that someone holds your mortgage, and they are billing you an amount you can't possibly pay—that's really scary," she says. "And they won't give an address to send a certified letter. What recourse do you have? I don't know what their goal was, but it sure felt sinister."
Charles Walker, 55, of Missouri, was riding high as a real estate broker. In July 2006, the family's real estate office was raided by authorities reportedly investigating mortgage fraud. No charges were ever filed, but the incident tainted Walker and forced him to give up his business.
"I went from making $500,000 a year to making $9.50 an hour as a customer-service representative working from home," Walker says.
By then, the family had already moved into a new house, purchased in the name of Walker's wife. The couple had been expecting a 30-year fixed-rate mortgage, but at closing, they were offered a different type of mortgage with a much higher interest rate. Because his family had already moved into the new home, Walker felt obligated to accept this different mortgage.
That type of bait-and-switch is something that has come up repeatedly as a problem in the subprime-mortgage mess.
By February 2008, the Walkers' savings were dwindling. The family was still current, but they realized that they would not be able to make the payments in the future. They contacted Aurora in the hopes of discussing some way to reduce their payments.
Aurora, he says, declined to modify the loan because the Walkers were still current on their payments. Aurora referred the Walkers to another lender, who wanted 20 percent down, which wasn't an option for them.
Walker followed up by writing to both Aurora and Lehman Brothers, requesting a meeting to discuss a loan modification. In response, he got a form letter offering options. He wrote again and got back the same forms.
Meanwhile, two other Walker-owned properties were also having problems. The tenants in both places had moved out. The Walkers decided to sell the properties. They found buyers for both. But when they asked Aurora to approve the deals, Aurora didn't respond. After three weeks, the buyers backed out.
Walker was forced to allow those properties to go into foreclosure. He continued to send letters to Aurora, asking to discuss modifying the loan on his home. No response.
Without a response from Aurora, Walker decided to stop making payments. He wanted a sit-down with the company to work out an arrangement that would allow him to keep up.
Aurora began responding with form letters. Then, in early September, Walker received a letter from Aurora stating it refused to work out anything on the loan. He called the company and was told there were missing documents.
Walker sent in the missing documents, even though he had already sent them in at least twice. One Aurora representative refused to tell him who owns his loans. "She says 'It's none of your business,' " he says.
On September 15, the company finally acknowledged that they were reviewing his request. Three days later, however, a lawyer for Aurora sent a letter that said the company was foreclosing and had set a sale for October 9.
Walker called to discuss this latest development and was told that Aurora would not help him because he was behind on the payments.
Months earlier, the company had said it wouldn't consider a modification because Walker wasn't behind on the payments. Now, they were saying the exact opposite. Walker was furious.
"They did it without working with us on it at all," he says. "When this started, we had the income and the money, and we could have worked something out."
Walker's wife filed for bankruptcy, which delayed the foreclosure until January, he says. Now, the family is hoping that Congress will come up with some way to bail out beleaguered homeowners like himself.
"We're hoping that Congress will do something," he says. "But it seems like the only way you get help here is if you're on Wall Street."After this story went to press for our print edition, Aurora Loan Service sent the following response after repeated requests for information from the Voice. Their response, in its entirety:
It is Aurora's goal to work with our customers so they can prevent foreclosure and protect homeownership. Our Customer Service team is trained to address customer's questions and provide recommendations specific to the individual's situation. We make customers aware of options such as repayment plan, forbearance, loan modification, short-sale and deed-in-lieu. In cases where the customer can benefit from talking with a HUD approved counselor, we provide them with the toll free number to contact a HUD approved counseling agent as the customer may benefit from financial counseling or additional assistance.
In January 2008, Aurora became a member of Hope Now, an organization of servicers dedicated to maximizing the preservation of homeownership and minimizing foreclosures.