The subprime contagion of John Edwards

The Wall Street Journal links the Democratic candidate for president to foreclosures of homes belonging to Katrina victims.

Published August 17, 2007 2:13PM (EDT)

The news that John Edwards has ties to subprime mortgage lending firms has been common knowledge since at least May. In 2005-06 he worked for a private equity firm, Fortress Investments, that owns several subprime lenders. He also has around $16 million invested in Fortress funds. Since he's been one of the most vocal Democratic candidates criticizing how subprime lenders have run amok, the juxtaposition has offered his political opponents a classic "gotcha" opportunity.

His defenders have attempted to make the distinction that Edwards has been campaigning specifically against "predatory" lenders. Subprime lenders, he has acknowledged, perform a useful service in expanding homeownership. But on Friday, the Wall Street Journal published a thoroughly reported article by Christopher Cooper that makes a good case that Fortress' subprime lenders may fit into the predatory category. And no matter how you slice it, foreclosing on properties owned by victims of Hurricane Katrina in New Orleans is not going to make for good press.

Mortgage experts say there's no clear line dividing standard subprime loans from "predatory" ones. Generally speaking, said Thomas Lawler, a former official at mortgage buyer Fannie Mae, predatory loans carry high interest rates that are allowed to rise but not drop. They may be loaded with prepaid fees. Lenders may make monthly payments look smaller than they really are by not requiring borrowers to put taxes and insurance in escrow. And the loans generally don't allow early payoff without a steep penalty. That bars refinancing if interest rates drop.

A review of some courthouse records in Louisiana shows that Green Tree and Nationstar mortgages carry many of those attributes. Several carry accelerators that allow the already-above-market initial interest rate to nearly double. They also carry penalties for early payoff.

In a side note, the Wall Street Journal says that Edwards was paid $479,512 in 2006 for part-time work in 2006 by Fortress. His job requirements: "to provide information about what he saw happening economically in the U.S. and overseas."

Nice work, if you can get it.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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