Goldman Sachs Agrees to Pay $5 Billion Mortgage Settlement

The Department of Justice (DOJ) today announced a $5.06 billion settlement with Goldman Sachs related to the company’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. 

Under the terms of the settlement, Goldman is required to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), and also requires the bank to provide $1.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing. 

Investors, including federally-insured financial institutions, suffered “billions of dollars in losses” from investing RMBS issued and underwritten by Goldman between 2005-2007, the DOJ said in a statement issued Monday morning.

“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 they were full of mortgages that were likely to fail,” said Acting Associate Attorney General Stuart F. Delery in a written statement.

Goldman will also pay $875 million to resolve claims by other federal entities and states.

Of this total, Goldman will settle claims to the following entities in the amounts of: $575 million related to the National Credit Union Administration; $37.5 million to the Federal Home Loan Bank of Des Moines as success to the Federal Home Loan Bank of Seattle; $37.5 million to the Federal Home Loan Bank of Chicago; $190 million to the state of New York; $25 million to the state of Illinois; and $10 million to settle claims by the state of California. 

The settlement includes a statement of facts to which Goldman Sachs has agreed, which describes how the company “made false and misleading representations to prospective investors about the characteristics of the loans it securitized and the ways in which Goldman would protect investors in its RMBS from harm,” the DOJ stated.

In offering documents, DOJ noted that Goldman told investors that “loans in the securitized pools were originated generally in accordance with the loan originator’s underwriting guidelines,” however, Goldman today acknowledged that, “Goldman received information indicating that, for certain loan pools, significant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized.”

For one August 2006 RMBS, Goldman has acknowledged that the due diligence results for some of the loan pools resulted in an “unusually high” percentage of loans with credit and compliance defects. 

Goldman also acknowledged that its Mortgage Capital Committee approved this particular RMBS for securitization without requiring any further due diligence. 

In another example brought to light by the DOJ, Goldman acknowledged that it was aware in early-mid 2006 of certain issues with Countrywide Financial Corporation’s origination process, including “a pattern of non-responsiveness and inability to provide sufficient staff to handle the numerous loan pools Countrywide was selling.”

In April 2006, while Goldman was preparing an RMBS backed by Countrywide loans for securitization, the DOJ noted that a Goldman mortgage department manager circulated a “very bullish” equity research report that recommended the purchase of Countrywide stock. 

“Goldman’s head of due diligence, who had just overseen the due diligence on six Countrywide pools, responded ‘If they only knew….” stated the DOJ.

The $1.8 billion in consumer relief that Goldman is required to pay under the terms of the settlement represents the largest commitment in any RMBS agreement to provide financing for affordable housing—a crucial need following the turmoil of the financial crisis, according to the DOJ.

Monday’s settlement is another example of the DOJ’s mission to hold accountable those whose illegal conduct resulted in the financial crisis of 2008, said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the DOJ’s Civil Division. 

“Viewed in conjunction with the previous multibillion-dollar recoveries that the department has obtained for similar conduct, this settlement demonstrates the pervasiveness of the banking industry’s fraudulent practices in selling RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing,” Mizer said in a prepared statement.

The agreement with Goldman Sachs arrives just days following the DOJ’s $1.2 billion settlement with Wells Fargo Bank, N.A. (NYSE: WFC), which settled civil mortgage fraud claims stemming from its participation in a Federal Housing Administration lending program. 

At $1.2 billion, this settlement is the largest recovery for loan origination violations in FHA’s history. 

Written by Jason Oliva

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