Goldman Sachs (GS) has settled a mortgage case brought by the U.S. Department of Justice accusing the firm of deceptive mortgage practices leading up to the 2008 financial crisis. As part of the deal, Goldman will pay $5.06B to resolve the charges. According to the DOJ, the bank also admitted that it issued representations that were “false and misleading” to prospective investors about the MBS that were up for sale. Details of the deal were announced in January after an agreement was reached in principal.
In a statement of facts, Goldman said that “significant percentages” of the mortgages it bundled with securities sold between ’05 and ’07 were not in line with the information provided to investors about the loans. The bank’s Mortgage Capital Committee approved every residential mortgage-backed security it assesses between December ’05 and ’07 even though they were aware that a lot of the home loans contained compliance and credit defects.
The settlement shows that Goldman was aware that a lot of the subprime loans it was packaging into securities could be defective, including an RMBS it created in ’06 using loans made by Countrywide Financial, which was the largest subprime loan provider. It was during this time that a Goldman manager issued an equity research report recommending that the stock be brought. Responding to the report, the bank’s due diligence head that had supervised the scrutiny of several Countrywide mortgage pools replied, “If only they knew.”
The government said that 70% of total loan pools were not examined for problems even though in one bond pool about 25% of loans that were examined were dropped because their quality was poor. For example, in 2006, Goldman notified investors via marketing materials that one underwriter in particular was dedicated to “quality over volume” when it came to the loans even though its own analysis determined that the underwriter, a Fremont General Corp unit, applied “off market” guidelines. In early 2007, the Fremont unit was shut down after the Federal Deposit Insurance Corp. said that the lender allowed people who couldn’t afford to pay back the mortgages to have them anyways.
The Justice Department also accused Goldman of, despite touting its efforts to make sure there were quality loans in mortgage pools, not disclosing that certain originators were cutting corners.
Goldman will pay a $2.4B civil penalty, $1.8B in homeowner and borrower relief, and another $875M to resolve other claims. The deal settles claims brought by the attorneys general of California, New York, and Illinois for Goldman’s underwriting, securitization, and sale of bonds from ’05 to ’07, as well as claims brought by the Federal Home Loan Banks of Chicago and Seattle and the National Credit Union Administration.
While the settlement amount may seem substantial, The New York Times reported that is not exactly the case. Provisions in the deal will reportedly let Goldman pay hundreds of million dollars less than the $5.06B noted because of tax credits and government incentives. Some speculate that when all is said and done, the settlement may be $1B less.
Goldman Sachs pays $5 billion to settle allegations it sold shoddy mortgages, The Washington Post, April 11, 2016
In Settlement’s Fine Print, Goldman May Save $1 Billion, The New York Times, April 11, 2016