Major Influence in Mortgage-Backed Securities Failures
In 2007-2008, the United States experienced what was unquestionably the most devastating housing crisis in its history. Regrettably, this housing market crash wrought financial shockwaves that still have our national economy reeling. Although there have been other financial crises that have impacted the economic health of the U.S., not since the stock market crash of 1929 have we endured such pecuniary woes.
Beginning around 2000, in effort to provide economic stimulus in the wake of the recession, the Federal Reserve and many lending institutions promoted loans with the express purpose of investing in the housing market. The public began to see an increase in home prices in conjunction with unconventional methods of financing such as adjustable loans or zero-down payment loans, and a real estate furor ensued. Buyers who might not otherwise qualify for financing now found themselves eligible for subprime credit, and many these buyers purchased properties with the intention of “flipping” them – purchasing homes while the market was still depressed and selling them later for huge profits.
Then in 2006, many of these buyers who had received subprime loans began going into default. Once the bottom fell out of the housing market the following year, these subprime loans ceased and interest rates soared. Millions of homeowners who would not have otherwise been able to purchase homes, or who purchased homes that they ordinarily could not afford, lost their homes to foreclosure. Even businesses were effected by the decrease in subprime loans and the increase in interests rates. Needless to say, the financial implications became pervasive in every aspect of the economy ultimately resulting in unemployment of over 10% by 2009.
Many times the financial institutions that developed these less-than-solid loans would then securitize them. This is the process of these mortgage-backed securities being pooled based upon the level of risk of the individual mortgages and then sold off to investors in an effort to create liquidity in the market. Two agencies that participated in the securitization of these subprime loans were the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Both agencies are government-sponsored enterprises (GSE) whose loans are backed by the federal government and carry a credit rating that rivals that of the U.S. Treasury so these loans tend to have lower interest rates than conventional loans.
All of the GSE Certificates that Fannie Mae and Freddie Mac purchased were from Goldman Sachs. As government-backed agencies, this presented a particularly keen risk to the economy. Consequently, in September of 2007, the Treasury took over both Fannie Mae and Freddie Mac, incurring over $5 trillion in mortgages.
As an independent regulatory agency that oversees such secondary mortgage markets as Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA) has filed a complaint against Goldman Sachs on behalf of these agencies. According to the complaint, Goldman Sachs, as the lead underwriter, sponsor, and depositor of more than 35 securitizations, the firm capitalized on the mortgage-backed securities crisis. The company purchased many of these loans at the beginning of the financial crisis, only to turn around and sell them knowing that there was an impending crisis in the market. The complaint also states that the company had “enormous incentive to process as many of these loans as quickly as possible.” This included over $162 billion in residential loans, subprime mortgages, and lines of credit.
According to the FHFA, Goldman Sachs received an emailed report in December 2006 from the CEO of a subprime mortgage lender that Goldman partially owned. The email that was directed to Kevin Gasvoda, the head of Goldman’s whole loan trading desk, stated, “Credit quality has risen to become the major crisis in the non-prime industry. We are seeing unprecedented defaults and fraud in the market, inflated appraisals, inflated income and occupancy fraud.”
“Goldman had unique and confidential access to the dire warnings directly provided by its own affiliate and proprietary originators that the subprime mortgage market was experiencing ‘unprecedented defaults and fraud,'” the brief said. “Yet Goldman failed to respond, except to the extent it sought to profit through shorting the market.”
The complaint also alleges that in addition to the information contained in this email, Goldman Sachs had “sophisticated and powerful proprietary models” that gave them an advantage in analyzing the subprime mortgage trends which should have provided them with insight into the looming mortgage disaster. Additionally, the FHFA alleges that Goldman Sachs failed to perform its due diligence to ensure their statements complied with what was recorded on their Registration Statements and that the firm aided and abetted fraud.
At the request of the FHFA, Goldman Sachs will face a jury trial which is set for September 29, 2014. The agency is seeking recovery of the amounts paid for the GSE Certificates, including interest; the GSE’s monetary losses, including their diminished value, principal, and interest; undisclosed punitive damages; attorney fees; prejudgment interest; and any additional relief that the court deems appropriate.
The Blum Law Group specializes in helping people who have been victimized by brokers or investment firms. If you believe you have suffered financial losses as a result of the actions of Goldman Sachs Group, Inc. or any of its affiliates, please give us a call at 1-877-STOCK-LAW for a free consultation.