Blessed are the Poor

Worm or beetle-drought or tempest-on a
Farmer's land may fall,
Each is loaded full o' ruin,
But a mortgage beats 'em all. -- Will Carleton, The Tramp's Story

Houses are the gifts that keep on giving to rich and poor alike. Just ask Dan Sparks-or the poor. The gift for Mr. Sparks is the opportunity to increase his wealth and the gift for the poor is shelter. Years ago that was accomplished by selling a house to the less fortunate using the subprime mortgage, and today it is accomplished by selling the same house to the same people using the contract for deed.

Until a recent New York Times story and editorial once again brought him to our attention, Mr. Sparks was remembered, if at all, for his last years at Goldman Sachs during 2007 and 2008. Mr. Sparks is not remembered for the Goldman Sachs activities that were brought to mind in April 2016, when Goldman Sachs agreed to pay $5.1 billion as a civil settlement because of its participation in the subprime mortgage market. During that period Goldman Sachs was bundling and selling securities that had been created by companies that specialized in converting subprime loans into bonds and selling them to unsuspecting investors. When the loans went bad, Goldman Sachs was left holding the money it had received from the sale of the bonds, purchasers of the bonds were left holding the bag, and former homeowners went from owning homes to becoming renters or homeless. Mr. Sparks, however, was remembered for something else.

During his last 1 1/2 years at Goldman Sachs, Mr. Sparks was involved in creating something called a "synthetic collateralized debt obligation." Unlike the securities Goldman Sachs sold to unsuspecting investors, the debt obligations Mr. Sparks helped create did not include actual bonds but, instead, instruments whose value was based on the the performance of sets of junk bonds. Those instruments were sold to unsuspecting investors by Goldman Sachs knowing they were worthless. (For those who would like more detail than is provided by the foregoing, that practice is described in some detail in a report on Mr. Sparks' testimony before Congress) What both activities had in common, however, was that both were part and parcel of the financial collapse that took place in 2007-2008. As a result, in hundreds of thousands of cases, buyers defaulted on their mortgages and lost their homes. And that brings us to the present.

Many companies have been formed that are buying up houses that were foreclosed on during the housing crisis. Those houses are being sold to investors in bulk at distressed prices, and the investors, in turn, sell them to people too poor to qualify for mortgages. One of the companies that has been formed to buy and then resell these houses is Shelter Growth Capital Partners, a company founded by Mr. Sparks and two of his former colleagues at Goldman Sachs. That firm was founded in 2014. The word "shelter" in its name, describes the product it is buying and selling. The word "growth" refers to the increased wealth Mr. Sparks and his colleagues hope to enjoy from their new business. Shelter Growth has bought more than 200 distressed homes and resold them to low income buyers. Since subprime mortgages have fallen out of favor, the homes are sold by Shelter Growth using contracts for deed. Unlike a mortgage, the contract for deed is a better vehicle for getting rich quick than was the mortgage. A contract for deed does not offer the protection for the buyer that a mortgage provides. Whereas a mortgage requires certain legal proceedings to be followed before an owner can be forced out of the house, and there is some supervision by a court in most cases, contracts for deeds offer no such protections and the seller can not only charge a high rate of interest, but is not encumbered by the need to go to court in order to retake possession of the house and force the buyer out. That, from the seller's perspective, is a big advantage. It is less of an advantage for the buyer. And here is a curious coincidence.

The house Mr. Sparks is now selling pursuant to a contract for deed, is almost certainly one of the millions of houses that were foreclosed on during the heyday of foreclosures that took place because of the subprime crisis that was caused by Mr. Sparks and his fellow bankers. Indeed, it might even be one of the houses whose mortgage was part of a worthless bundle of mortgages sold by Goldman Sachs to unsuspecting investors. And now that house is once again being used to enhance the wealth of Mr. Sparks and his colleagues and to provide shelter to the less fortunate. Here is another part of the same coincidence.

If a buyer defaults on the terms of the contract, the people at Shelter Growth who kick the buyer out of the house, are the same people whose subprime mortgage activities caused there to be lots of cheap houses available for Shelter Growth to buy and resell. And Shelter Growth may very well be selling those houses to the same people who lost them in foreclosures 10 years ago. Were that to happen it would merit an entry in Ripley's Believe It Or Not!