Where did Peter T. Paul get his money?
The man whose name adorns the UNH business school is a financier who helped create securitized low-doc loans
Financier Peter T. Paul, the man for whom the University of New Hampshire’s business school is named, says he was smack in the middle of the 2008 financial meltdown, but that doesn’t mean he caused it.
“I was a mortgage banker, but I didn’t bring down the financial system of the free world,” he told NHBR in a phone interview from his office in San Francisco.
In fact, when Paul donated some $25 million to build a new building for UNH’s business school, no one questioned the source of his money. But early this year, when he launched a $500,000 Super PAC to support Dan Innis (the former dean of the Peter T. Paul College of Business and Economics), he became a target of criticism.
“Once you cut a check and get involved in our politics, everything changes,” said Arnie Arnesen, a liberal talk-show host and a former Democratic candidate for governor and Congress.
Added Arnesen: “Paul helped push us to the financial edge.”
But did he?
• Paul did pioneer the securitization of “Alt-A” loans – loans granted to those with little proof of income – at Headlands Mortgage Co., a company he founded and later sold for $473 million to GreenPoint Financial Corp. in New York City.
He left GreenPoint – identified as one of the larger subprime lenders in the country – long before it became the target of several lawsuits that claim most of its loans were no good. GreenPoint and its successor, Capital One, now are dealing with a subpoena from federal and state authorities investigating mortgage fraud.
• After selling GreenPoint, Paul started Paul Financial, which flourished and later failed, resulting in large losses for himself and his borrowers. And it became the target of a class-action truth-in-lending suit that was settled last November for $1.75 million.
• Paul then returned to the mortgage business, this time as a buyer of some of the same mortgages that he once sold, once they began to perform again.
Many experts blame the securitization of low-doc loans – the very instruments Paul helped pioneer – as one of the causes of the Great Recession, but Paul doesn't agree.
“In retrospect, things become extremely clear. … The credit standards loosened, I guess. You pretty much had everyone standing on the acceleration of the train at that time from the top down,” said Paul. “We tried not to be the bleeding edge of the more aggressive lending, but the meltdown of property value is greater than anything I anticipated. I wasn’t responsible – I was part of it, but I don’t think I shared the guilt. We did the best we could. It was legal business.”
“What he did was legal. But was it prudent? Was it right? It was legal, but it was just wrong,” said Arnesen, who in April authored an op-ed piece in NHBR that questioned Paul’s business dealings (“Peter T. Paul, Dan Innis and questions of ethics,” April 4-17 NHBR).
Paul, a native of Troy, N.H., who graduated from UNH in 1967, certainly didn’t intend to do anything wrong. Indeed, in 1995, just as he was getting into the thick of the spread of low-doc loans, he founded Headlands Foundation, a nonprofit charity, in order, he said, to do things right.
In 2001, still flush with cash from the sale of Headlands Mortgage, he gave UNH $10 million to fund two chairs, one in space science and another in developmental psychology. He made the $25 million gift to the business school in 2008, right after Paul Financial went under.
As Paul tells it, he had been kicking around in the mortgage business for some 15 years after he earned his MBA from Boston University.
He said his goal was to do something different. He wanted to help people who were having trouble getting a traditional mortgage – the self-employed, those temporarily out of work who had a lot of money in the bank or could make a big down payment, or foreign nationals whose income couldn’t be verified easily.
Headlands Mortgage, which he founded in 1986, called them Alt-A loans: Alternative “high-quality” loans. The California-based company examined the worth of the home and the down payment, the amount of cash in the bank, and the credit history, but was looser on income verification.
“Jobs can change,” Paul said. “If you are self-employed, that’s last year’s income and may not be true today.”
At first, Headlands had 10 employees, but as regulations loosened during the boom of the mid-1990s, Paul and others like him were able to bundle together these irregular mortgages and sell them off to agencies like Fannie Mae or investors, just like traditional loans.
Largest subprime lender
By 1997, Headlands ranked as the second-largest wholesale mortgage originator in the U.S. that was not publicly owned or affiliated with a public company, according to National Mortgage News. When it went public in February 1998, in a $96 million initial public offering that actually raised $110 million, it had 1,000 employees. And by the end of the year, when GreenPoint Financial agreed to acquire it for $473 million, it was originating $6.8 billion in loans, more than double the 1996 amount.
GreenPoint – an established savings-and-loan in Brooklyn – was also getting into the aggressive lending business in 1995 when it acquired Barclays American Mortgage Corp., so when the Headlands deal closed in March 1999, it became an alternative loan originator powerhouse.
Between 1997 and 2001, GreenPoint was the largest subprime lender, according to “Anti-Predatory Lender Legislation: A Multi State Survey of Impacts,” by Tonya Diane Zimmerman, a professor at the University of Maryland, Baltimore County. Headlands was 25th.
But Paul disagrees with those rankings and their characterization of GreenPoint and Headlands. There were other lenders that did more and, he said emphatically, “We did not make subprime loans.”
He said the loans went to people who could pay them back, and – at least during his tenure at GreenPoint – they had a very low default rate. Indeed, there was very little litigation over the loans originated at Headlands or while Paul was at GreenPoint. That could have been because the borrowers were more creditworthy, or because few defaulted during a time of rising property values.
“No one complained when the elevator was going up,” observed Paul.
After the deal closed, Paul became a top executive at GreenPoint Financial. He was vice chairman of the board of directors and CEO and president of GreenPoint in March 1999.
In November 1999, GreenPoint introduced a new product.
"The 103 percent mortgage is designed to address the biggest hurdle facing families wanting to purchase their first home – saving for the down payment," said Paul in a GreenPoint press release at the time. "By lending more than the value of the home, GreenPoint has effectively removed that hurdle, as well as the burden of coming up with the cash necessary to pay for closing costs."
When asked about that, Paul said that the guidelines already allowed an extra amount to cover closing costs, that very few borrowers qualified for the full 103 percent, and that they were mainly insured by a third party.
“It may sound very horrendous, but it was maybe a tenth of one percent of what we did,” Paul told NHBR. “I probably put slick literature out, because you know, it had sex.”
But Paul said GreenPoint “really didn’t want me there,” alluding to “differences of opinion” that he would not specify. He would just say, “I was an entrepreneur. They were a large bank.”
In May 2001, SEC documents indicate that he was a consultant for $10,000 a month, but he said he did very little consulting.
“They probably wanted to control me. They never called me,” he said. “I’m gone. I have no power. Once you sell something, I’m not running it.”
His consultancy lasted until he resigned from the board in July 2003, even though – as SEC filings confirm – he was re-elected to a three-year term as vice chair three months earlier.
By then, Paul had already started up Paul Financial, and standards had loosened considerably.
“I was a pioneer,” he said. “All of a sudden, it became mundane.” Such loans were “white bread,” he said, and “we were looking to be more interesting.”
One instrument utilized at Paul Financial was using home equity loans piggy-backed onto the original mortgage so borrowers could buy a bigger house. But as the value of the home fell, Paul said he would no longer extend these loans, even though some people had counted on them to pay their regular mortgage. Some lost their homes, and Paul lost his business.
Then came the lawsuits. Most were against GreenPoint and its successors. GreenPoint had been acquired for $6.3 billion by North Fork Bank in October 2004. In December 2006, Capital One bought North Fork and shut it down in the third quarter of 2007.
One suit filed in 2008 by U.S. Bank National Association was over $1.83 billion in securities GreenPoint had sold it between 2003 and 2006. A sampling of more than 1,000 loans showed that an “astounding” 93 percent were defective and that 41 percent were delinquent or charged off, U.S. Bank charged.
“The most prevalent of the breaches involve pervasive misrepresentations about borrower income, employment, assets, intentions to occupy the purchased properties,” said the complaint. It was “a wholesale abandonment of any attempt to gauge the ability and willingness of the borrowers to repay their obligations.”
Class action suit
The most recent large lawsuit was filed last July over $915 million in loans sold in 2006 to Lehman Brothers, which went under, thanks to shaky mortgage back securities, long after Paul left.
However, Paul was still at Paul Financial in August 2007 when a class-action suit was filed against that company alleging that loans during the entire four-year tenure of the company violated the Truth in Lending Act.
The complaint alleged that residents were lured into an adjustable rate mortgage with a “teaser” rate of 1 or 2 percent that would only be good for a few months, with promises that they could refinance afterwards.
In addition, the prospective borrowers would be given a payment schedule that would result in increasing the amount owed on the property, rather than paying it off – negative amortization.
While the disclosure said this might happen, the lawsuit charged that it was “guaranteed” to happen.
Paul Financial shut down a month later as the housing crisis reached its climax, leaving it to the Royal Bank of Scotland – which now owned the loans – to settle the case last November for $1.75 million without admitting the allegations.
Paul dismissed the suit as “judge-shopping” by attorneys seeking fees who “got lucky” that the class was certified. The disclosure language was set by law, so his company “didn’t have a choice” in how to do it.
Paul said that making that $25 million donation to UNH after Paul Financial failed “hurt a little,” but as a UNH Foundation board member, he had already made the commitment. Innis was one of the reasons, he said.
Paul was not on the committee that hired Innis, though he said he was consulted on the matter from afar. In 2008, the then-Whittemore School of Business and Economics awarded Paul its Annual Achievement in Business Award. In 2009, the UNH Hampshire Alumni Association recognized Paul with its Pettee Medal, and at the start of 2013, UNH renamed the business school the Peter T. Paul College of Business and Economics.
That was “kind of cool, sort of like frosting on the cake,” Paul said.
As for his Super PAC, Paul said he has never been involved politically before. “I prefer to watch.”
So when he “dipped his toe” in the political waters at the end of January by setting up the NH Priorities PAC, a $500,000 Super PAC, it was primarily to help Innis, who had stepped down as Paul College dean in September and announced his challenge to Congresswoman Carol Shea-Porter in October, though first he has to face former Congressman Frank Guinta in the Republican primary.
So far, the PAC has spent about $120,000, Paul said.
Paul is primarily backing Innis because he is a friend and agrees with him politically – a social liberal who believes in limited government – and who was more electable than his primary opponent.
The PAC is also considering donating to like-minded candidates in more local races, such as the state Senate. “I like New Hampshire,” Paul said. “Because it is more manageable in size.”
Calls to the campaigns of Innis, Guinta and Shea-Porter were not returned. Calls to the Paul College were referred to UNH, which simply noted that Innis was no longer the dean of the school.
Meanwhile, Paul’s new company, Headlands Assets Management, is buying up the same kind of mortgages he used to originate. The loans had been non-performing, but the borrowers are starting to pay again, so they are now classified as “re-performing.” He founded Headlands Asset with Mieko Willoughby, who used to work with Bear Stearns, with the hopes of making a 30 percent profit.
Paul had worked with Bear Stearns to bundle some of his first Alt-A loans back in 1996. And it was two Bear Stearns hedge funds that held some of those troubled GreenPoint mortgages.
The Bear Stearns collapse was widely seen as triggering Wall Street’s financial meltdown in 2008.
Federal and state regulators might currently be looking at some of those very same loans. In March, Capital One revealed that it and GreenPoint had been subpoenaed in February by federal and state law enforcement agencies investigating fraud and abuse relating to “mortgage originations, mortgage loan sales and the mortgage securitization process.”
But despite the continued controversy over the loans and loan process, Paul doesn’t know what else he could have done at the time he started offering the products.
“The standards got loose, and the only thing we could have done is not lend. I did not expect the crash to be this way,” said Paul. “Everybody who was in the financial service bubble could have some kind of taint on them, but that’s kind of a broad area.”