Second of four parts

SAN JOSE – When California wildfires ruined their jewelry business, Tony Becker and his wife fell months behind on their mortgage payments and experienced firsthand the perils of subprime mortgages.

The couple wound up in a desperate, six-year fight to keep their modest, 1,500-square-foot San Jose home, a struggle that pushed them into a bankruptcy filing.

The lender with whom they sparred, however, wasn't the one that had written their loans. It was an obscure subsidiary of Wall Street colossus Goldman Sachs Group Inc.

Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as Becker and his wife.

The couple allege that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman's then-Chief Executive Henry Paulson – later U.S. treasury secretary – in 2003.

Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would have allowed them to defer some payments, nor on a state law that would have enabled them to offset their debt against separate, investment-related claims against Goldman.

In July, Tony Becker and Celia Fabos-Becker won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.

Theirs is an infrequent happy ending among the hundreds of cases in which subsidiaries of Goldman, better known for sending top officers such as Paulson to serve in top Washington posts, have sought to contain bondholder losses by foreclosing on properties and evicting delinquent borrowers.

Goldman spokesman Michael DuVally declined to comment on individual cases or on the firm's new role in bankruptcy courts.

Joining other Wall Street firms that bought millions of subprime mortgages, Goldman companies have gone to courts from California to Florida seeking approval to foreclose on the homes of middle- and lower-income Americans who couldn't keep up with their loans' soaring monthly payments.

Some borrowers were speculators or homebuyers who exaggerated their incomes on loan applications, thinking they'd always have an escape hatch because housing prices would keep rising. Others, however, were victims of fast-talking mortgage brokers who failed to explain that the loans' interest rates could rise as high as 15 percent. Many borrowers who defaulted on their mortgages may never qualify for a home loan again.

And millions of those borrowers have defaulted on mortgage payments, contributing to a historic slump in home prices and depressing the bonds' value. Half the homes in some California neighborhoods have been subject to foreclosures or short sales, in which a home is sold for less than the mortgage balance, and either the seller or the lender takes a loss.

In the city of San Fernando, in Los Angeles County, Dina Alfero-Pacheo qualified for two mortgages totaling nearly $500,000, with monthly payments starting at $2,004. By 2007, the payments had grown to $3,761. In a bankruptcy filing early this year, Alfero-Pacheo said she was a bartender earning $3,800 a month. Goldman bought her first mortgage from Argent Mortgage Co., a subsidiary of now-defunct subprime lender Ameriquest Mortgage Co., and recently got title to the house, which had sunk in value to $280,000 from more than $500,000.

In Orlando, Fla., Adela Mendez seemed to be someone who would've known the risks when she took a $164,000 mortgage on her home from Argent in 2005 and a $75,000 second mortgage a year later. In a bankruptcy filing this year, she listed her occupation as a loan specialist for Washington Mutual, a leading subprime lender that collapsed last year.

TUESDAY: Goldman Sachs and other Wall Street firms turned to secret Cayman Islands deals to draw overseas investors, including European banks and other foreign financial institutions, to invest hundreds of billions of dollars in securities tied to risky U.S. home loans. Unlike U.S. investors that lost money on the securities, however, these overseas institutions have fewer legal options. Call Greg Gordon, McClatchy Washington Bureau, (202) 383-0005.