Edwards Says He Didn't Know About Subprime Push
Friday, May 11, 2007
The hedge fund that employed John Edwards markedly expanded its subprime lending business while he worked there, becoming a major player in the high-risk mortgage sector Edwards has pilloried in his presidential campaign.
Edwards said yesterday that he was unaware of the push by the firm, Fortress Investment Group, into subprime lending and that he wishes he had asked more questions before taking the job. The former senator from North Carolina said he had asked Fortress officials whether it was involved in predatory lending practices before taking the job in 2005 and was assured it was not.
Subprime loans are aimed at buyers with poor credit histories and charge higher rates because of the risks. Some loans carry fees and large rate increases that are hidden from a home buyer.
Largely as a result of the rise in subprime lending and the cooling housing market, home foreclosure filings rose to 1.2 million in 2006, an increase of 42 percent. At the same time, the drop in value of subprime lenders has presented a buying opportunity for investors such as Fortress.
Fortress hired Edwards as an adviser in October 2005, nearly a year after his losing campaign as Democratic vice presidential candidate. At the time, it owned a major stake in Green Tree Servicing LLC, which rose to prominence in the 1990s selling subprime loans to mobile-home owners and now services subprime loans originated by others.
Fortress and its partners bought Green Tree in 2003. According to documents filed with the Securities and Exchange Commission in April, its holding in Green Tree was as high as $492.4 million at the end of 2005 -- 4 percent of Fortress's holdings at the time.
Last July, Fortress expanded its stake in the industry by buying Texas-based Centex Home Equity, a top-25 subprime lender, for an estimated $540 million. In December, Centex Home Equity, now called Nationstar Mortgage, bought the loan-origination division of Champion Mortgage, bringing another subprime lender into the Fortress portfolio.
In March, Newcastle Investment Corp., a real estate investment trust managed by Fortress, announced that it, too, was moving into the subprime market with the purchase of a $1.7 billion loan portfolio. Also in March, Fortress bought about $4 billion in subprime loans from Fremont General Corp.
Edwards said yesterday that he recalls being told at the time of his hiring that some of Fortress's private equity holdings did lend to start-up businesses, which is why he asked about predatory lending practices. But he could not recall whether the firm's partners told him it had a major stake in Green Tree.
"Those are the things I remember," he said. "They may have told me more." Had he learned that Fortress owned a loan servicer with a history of predatory lending practices, he said, "I would have asked some very specific questions about it."
Fortress's growing role in the subprime lending market provides a second contrast between the firm's business practices and the positions Edwards has taken as the presidential candidate who has made poverty a major campaign theme. The Washington Post reported last month that Fortress's partners and its foreign investors benefited from the kind of offshore tax breaks Edwards has criticized as a candidate.
Last month, Edwards announced a plan to fight predatory lending. He said that an increase in subprime loans and predatory mortgages was resulting in a surge of foreclosures that risked "devastating communities," and that "shameful lending practices . . . are compromising our strength as a nation."