For personal trainer Trevor Pace, the house at 418 Homeplace Drive in Stockbridge was more than just a mansion-style home with a fireplace in the bedroom and a jacuzzi en suite.
“It was everything we had dreamt,” says Mr Pace, who moved into the house in 2001 together with his wife, Colleen, and their two children. It was the first place they had called their own.
Yet five years later, a French bank bought a financial security that was, in effect, a bet that the Paces would default on their mortgage and be forced to leave their comfortable suburban home.
Without Mr Pace or his family realising it, 418 Homeplace Drive had become part of the financial machine created on Wall Street that wrecked the American dream for millions of people and nearly brought down the international economy.
Just south of Atlanta, Stockbridge has been touched by other important social changes. More than a century ago, Martin Luther King’s father was born there; by the 1960s, it had become the sort of suburb which closed down its public picnic areas because African-Americans could no longer be barred from entry.
During the past two decades, the house on Homeplace Drive has come to represent another period in American history. In the years running up to the financial crisis, it changed from a solid investment to being sliced and diced as part of a security that Wall Street traders sold on to gullible investors all over the world — and which rocked the global economy when it went sour. Since the crisis, it has been on the books of one of the largest private equity groups which have quietly supplanted investment banks as the dominant players in the financial world.
A self-employed fitness instructor, Mr Pace spends every waking hour pumping iron with clients of his “total body transformation service”. “Remember, your body is the greatest creation you will ever have,” a recorded greeting tells callers to his mobile phone.
He started the business in 1991 when he returned to Atlanta after a childhood spent on military bases. At the time, the area was undergoing a huge transformation. Every day, 300 new residents moved into the city and its suburbs, and every week, racing to build houses for them, contractors would tear down a patch of woodland the size of 63 baseball fields.
One of those was The Legends at Lake Spivey, a development of 101 homes with identical mock-iron mailboxes organised around forking streets with names such as Timeless Walk, Memory Lane and Homeplace Drive. Vickie Earle was the first buyer of number 418, moving in shortly after it was finished in 1999.
There was a communal swimming pool and a clubhouse where the neighbourhood association held occasional ice-cream socials. Ms Earle stayed for two years, before quitting her management job at Delta Air Lines and selling up for about $10,000 more than the $189,900 she paid. She retired to Florida, telling acquaintances she planned to watch the spaceships blast off from Cape Canaveral.
Even with the dotcom bust and the US in recession, house prices were still rising sharply. Part of the reason was a proliferation of mortgages on unheard-of terms, offered to first-time buyers or people who previously struggled to get loans.
Among those people was the self-employed Mr Pace, who moved into Ms Earle’s old house by borrowing the entire $200,000 purchase price, according to county records. “My wife had actually found the house,” Mr Pace says, recalling their excitement at moving into the new community.
A few years later he and his wife took out an even bigger loan that offered smaller monthly payments over the first few years. And then it all fell apart.
In another time and place, the payments on Mr Pace’s mortgage would have been the concern of no one but his bank manager. Not so in the globalised financial markets of 2007, where the Paces’ mortgage found its way into Wall Street’s huge securitisation machine.
Using mortgage details on Bloomberg that match a deed signed by the Paces and lodged in a Georgia courthouse, it is possible to follow a mortgage (apparently theirs) through the financial system. That loan, dated June 2005, was $14,000 larger than the one they took out when they first moved in four years earlier, although Mr Pace does not remember receiving any money from the refinancing. It was a variable-rate mortgage, with a promotional rate and no repayments of principal for the first three years.
The lender was Your-Best-Rate, a small outfit set up in Atlanta by a mortgage salesman named Jeff Cutler, who promptly sold the loan to Countrywide Financial. “We attract the borrower, underwrite the borrower based on their eligibility to be approved, close the loan,” explains Mr Cutler. “[Countrywide] basically bought it at the end of the assembly lines.”
Others who were involved in this trade described it more bluntly. “You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower or whether the loan performed,” says Christopher Cruise, whose courses in mortgage origination were attended by 10,000 salespeople a year.
If Your-Best-Rate did not have to worry too much about whether the Paces would be able to pay back their loan, neither did Countrywide. It piled up thousands of mortgages — many of which, it conceded, were “credit blemished” — and sold them in bulk.
The Paces were among 10,507 borrowers whose home loans Countrywide packed into a set of securities called the CWABS Asset-Backed Certificates Trust 2005-11. The quality of the borrowers did not have to be high. Homebuyers could qualify if they had been out of Chapter 7 bankruptcy proceedings for “at least one day”.
While many of the borrowers had questionable personal credit ratings, the CWABS Asset-Backed Certificates Trust 2005-11 were deemed much safer credits. Even the most junior bonds, which would be hit first by any defaults and paid interest at 1.8 per cent over the Libor interbank lending rate, received an investment-grade rating. More than half the bonds were triple A, the same as the US government. The most senior paid a premium of just 0.16 per cent over Libor.
The assumptions about the US housing market that underpinned this premium rating unravelled quickly in 2007, as Americans began defaulting in unprecedented numbers. That sent the price of mortgage bonds such as CWABS 2005-11 into freefall, and it meant no one wanted to buy any more loans from mortgage originators. Your-Best-Rate gave up on writing its own mortgages; in 2010 the company folded.
Mr Pace now faced sharply higher payments as his introductory deal expired. “It just turned out that every place we went trying to refinance, they said it can’t be done,” he says. In August 2008, the monthly instalments recorded by Bloomberg shot up from just over $1,200 to nearly $1,900. The Paces never made the payment. Countrywide, still responsible for collecting payments even though it had sold almost all the debt, agreed to add the arrears on to the end of the loan, but it did no good. In January, they stopped the payments, again, this time forever.
“It was a pretty traumatic time,” says Mr Pace. “It was just basically a lot of hustling.”
A decade of post-crisis litigation has provided at least a partial picture of what happened to many of the players in the chain that extended out from Mr Pace through the global financial system.
Pension funds in California, Maine, Nevada, Vermont and Washington state all sued the new owner of Countrywide, claiming that many of the sales documents for its securitisation deals were insufficiently forthcoming about the risks. Another suit, filed by 22 large bond investors including BlackRock and MetLife, claimed Countrywide loans failed to meet underwriting guidelines. Bank of America, which bought Countrywide in January 2008 for $4bn, has paid more than $20bn to settle these and other Countrywide-related cases.
But the losses on the mortgage-backed securities issued by Countrywide were only a part of the story.
In 2006, an affiliate of Goldman Sachs bought more than $2bn-worth of bonds — many backed by subprime or “mid-prime” mortgages. Among them were hundreds of millions of dollars’ worth of loans issued by Countrywide, including the one taken out by the Paces. Goldman packaged them into a “collateralised debt obligation” called Davis Square VI.
The securities Goldman bought were among the first in line to bear losses if the underlying mortgages went into default; only 4 per cent of them had received the highest triple A rating from the credit agencies, according to a pitchbook issued by Goldman before the securities were issued. Yet through the same magic of bundling them together and promising that only the most junior investors would shoulder the early losses, the rating agencies slapped triple A labels on more than 91 per cent of the Davis Square certificates, according to the documents.
As Mr Pace and millions of other Americans stopped paying their mortgages, the consequences cascaded through Countrywide mortgage-backed securities and into vehicles including Davis Square. The losses stretched far beyond America. Landesbank Baden-Württemberg, a Stuttgart-based savings bank, complained in a lawsuit against Goldman that it lost $37m. Scores of other European banks were burnt by similar investments.
But there was another side to CDOs. Sophisticated investors, spotting the cracks in the US housing market, were looking for ways to profit from a collapse. Société Générale, the French bank, was one of those that took out insurance against a collapse in the value of Davis Square, buying exotic derivatives contracts from the insurance group AIG. These contracts were, in essence, a way of betting that many homeowners would default on their mortgages. Goldman itself bought similar protection on other CDOs it had sold. Hedge funds could short the housing market by buying insurance against losses on mortgage bonds they did not own.
Owing more and more money on these credit default swaps, AIG was forced to accept a US government bailout and taxpayers’ money immediately flowed through to the banks. LBW accused Goldman of malfeasance over the creation of Davis Square, but a court threw out the claim. SocGen says that rather than betting against the mortgage market, it bought insurance on mortgage bonds it already owned and took no “view one way or another” whether any particular mortgage performed or not. Goldman has said it suffered losses on subprime mortgages overall and also used credit insurance to hedge its risk, not to bet against its clients.
The Paces clung on at 418 Homeplace Drive for years, twice filing for bankruptcy, which forestalled the mortgage company’s effort to take over their house.
By 2011 their mortgage was $53,000 in arrears. They owed $218,303 on a house that was now reckoned to be worth barely $140,000, about three-quarters of what the builder had sold it for a decade earlier, and had just $900 in three bank accounts and about $13,000 in retirement savings. (Mr Pace’s wife, from whom he has since separated, could not be reached to comment for this article.)
Eventually, in November 2013, they succumbed, joining a wave of foreclosures that has seen 7.8m families thrown out of their homes since the beginning of the financial crisis.
Their home was sold at auction on the courthouse steps — but the new owner was not a young family like the Paces, nor a baby boomer like Ms Earle. It was an investment fund run by a billionaire financier, for whom the great dislocation would turn out to spell a great opportunity.
“I love houses,” Stephen Schwarzman told an interviewer in 2008. “I’m not sure why.”
Mr Schwarzman’s private equity firm, Blackstone, already controlled companies that employed 520,000 people and had combined revenues of $94bn, but in the bombed-out house prices of 2008, it saw a chance to do something new and ambitious.
Since the crisis Blackstone has marched into markets that others have been forced to vacate. Its credit arm finances businesses that would once have borrowed from Wall Street banks. But nothing underscores Mr Schwarzman’s rise more clearly than the portfolio of more than 80,000 single-family homes that have made his firm one of America’s biggest private landlords. With so many people unable to get on the property ladder, Blackstone reckoned the rental market would be highly lucrative.
Beginning in 2012, the firm dispatched representatives to buy houses in fast-growing metropolitan areas across the nation, including southern California, Chicago and Atlanta. About one-third of the properties were bought in foreclosure auctions, typically without anyone even inspecting them first.
The result of that effort is a company called Invitation Homes that floated on the stock market last year. Today it is worth $21.6bn including debt, buoyed by a 35 per cent increase in US house prices since the start of 2013 and an unyielding approach that few private landlords can match.
The tenants at 418 Homeplace Drive did not reply to phone calls or letters, however Invitation Homes says it spent about $26,000 renovating the property; a similar four-bedroom home nearby can be rented for $1,600 a month.
Invitation owns 12,000 homes in Atlanta alone. “We’ve bought homes in the subdivisions that provided solid, safe neighbourhoods….that would be attractive to families who want to live in and rent these homes for the long haul,” says Charles Young, chief operating officer of Invitation Homes.
Mr Pace had never heard of Mr Schwarzman. “They’re looking at the money,” he says, when told of the multibillion-dollar profit that his firm could make on the houses. “They’re not looking at the lives.”
When Blackstone took over the keys to his dream house, Mr Pace began staying with a nearby friend, hoping his children would not have to change school. He says he has yet to recover from the five-year hustle that ultimately failed to keep him in his home.
“As far as financially being able to get another house, I have still been unable to do that,” he says. “I’m working towards it. Yeah, I’m working towards getting back into a house. I miss it.”