“About a decade ago, Goldman Sachs Group Inc.’s due diligence for a residential mortgage-backed security showed an “unusually high” percentage of loans with credit and compliance defect…
…When a review committee asked “How do we know that we caught everything?” an employee said, “we don’t.” The committee approved the deal.”, Aruna Viswanatha, “Decade-Old Details Revealed in Goldman Pact”, The Wall Street Journal, April 12, 2016
“I contend that most of these due diligence underwriting defects were either not correct or not material. They were just a Red Herring that allowed the government and private plaintiffs’ to claim securities fraud on the part of securities issuers and underwriters. How can I say that? Look at blog postings #410 and #514 below. The due diligence error rates in 2014 are as high or higher and no one is doing a thing about them. Why? Because they are defects that are not material. That is the only logical answer. If not, how do you explain them? By the way, why do you think all these matters were settled by the government? I think because they would have never proved them in a court of law.” Mike Perry, former Chairman and CEO, IndyMac Bank
October 7, 2014 – Statement 410: “Again, the truth is finally emerging. FHA’s audit of mortgage loans insured by them in Q1 2014 apparently has uncovered huge, “material” underwriting error rates. If this is true, it goes a long way to disprove the mainstream view that pre-crisis mortgage underwriting deficiencies were a material cause of mortgage (and mortgage securities) losses during the financial crisis…
December 2, 2014 – Statement 514: “If one in seven appraisals are currently inflating home values by 20% or more, why aren’t Fannie, Freddie, FHA, and VA stepping up lender buybacks and instead recently announced policies that act to reduce them? And why aren’t the banking regulators doing more than “reviewing the issue”? I will tell you why…
Decade-Old Details Revealed in Goldman Mortgage Pact
Bank agrees to pay $5 billion to resolve U.S. and state claims that it misled investors
New York Attorney General Eric Schneiderman spoke at a news conference Monday in Manhattan. Goldman Sachs completed an agreement to pay $5 billion to resolve U.S. and state claims that it misled investors about mortgage securities. PHOTO: STEPHANIE KEITH/REUTERS
By Aruna Viswanatha
About a decade ago, Goldman Sachs Group Inc.’s due diligence for a residential mortgage-backed security showed an “unusually high” percentage of loans with credit and compliance defects. When a review committee asked “How do we know that we caught everything?” an employee said, “we don’t.” The committee approved the deal.
That exchange, and several other details on how Goldman packaged and sold securities backed by mortgages before the credit and financial crisis culminating in 2008, were unveiled Monday in a final settlement between the Wall Street bank and the Justice Department in which Goldman agreed to pay $5 billion.
Under the agreement, the bank acknowledged it sold tens of billions of dollars in risky mortgage securities, and didn’t screen out questionable loans from some of the bonds in the way it told investors it would, authorities said.
In one bond deal, for example, a Goldman employee found “[e]xtremely aggressive underwriting,” but only took out questionable mortgages from 30% of the deal, according to a statement of facts released in connection with the agreement. In another instance, the bank believed a lender’s underwriting guidelines were “off market,” meaning that “very few lenders” offered a similar feature, yet told investors that the lender had a “commitment to loan quality over volume.”
The pact, which mirrors past agreements other banks have reached tied to the crisis and doesn’t specifically name any allegedly culpable employees or executives, includes a $2.3 billion federal penalty levied by the Justice Department. It also contains $875 million to end claims by several other federal agencies and states including New York, and $1.8 billion in help to struggling borrowers.
The bank announced it had reached a tentative accord in January. On Monday, Goldman spokesman Michael DuVally said: “We are pleased to put these legacy matters behind us. Since the financial crisis, we have taken significant steps to strengthen our culture, reinforce our commitment to our clients and ensure our governance processes are robust.”
The agreement is the latest from an effort by the Justice Department, New York and other states to penalize banks for allegedly fueling a housing bubble and its subsequent collapse by aggressively selling shaky mortgages.
“This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” said Stuart Delery, the No. 3 official at the Justice Department.
New York Attorney General Eric Schneiderman said his state is expected to receive $190 million in cash and $480 million in homeowner help under the accord, money he said would to go “help New Yorkers keep their homes and rebuild their communities.”
The government’s inquiry into Goldman related to mortgage-backed securities that the firm packaged and sold between 2005 and 2007, the years when the housing market was soaring and investor demand for related bonds was still strong.
The same market later served as ground zero to the worst financial crisis in decades, tipping the economy into recession.
Goldman told investors starting in January 2006 that it would review underwriting and compliance processes at any lender it purchased loans from, according to the statement of facts. The statement said Goldman also reviewed a sample of loans to assess whether they met the lender’s underwriting guidelines.
But between December 2005 and 2007, the reviewers flagged as many as 20% of the sample loans as deviating from guidelines or presenting potentially unacceptable risks, some of which Goldman still used in its mortgage securities. Goldman usually didn’t increase the review pool to identify other questionable loans, the statement said.
Monday’s settlement showed some at Goldman knew of coming risks before the bubble burst. In April 2006, for example, a Goldman manager circulated a “very bullish” research report on Countrywide Financial Corp., one of the largest subprime lenders which later collapsed during the crisis.
Goldman’s head of due diligence, who had just overseen the bank’s review on six Countrywide deals, said upon seeing the report: “If they only knew . . . .