May 2016 - Rise and Fall

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TH E M R EP O RT | 63 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T LOCAL EDITION SECONDARY MARKET According to the Justice Department, Goldman Sachs is required to pay $2.385 billion in a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). In addition, the investment firm will provide $1.8 billion toward loan forgiveness and financing for affordable housing, which includes relief to underwater homeowners, distressed borrow - ers, and affected communities. Goldman will also pay $875 mil- lion to resolve claims by other federal entities and state claims, in which $575 million will go to the National Credit Union Administration (NCUA). "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 Acting Associate Attorney General Stuart F. Delery. "This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences." Principal Deputy Assistant Attorney General Benjamin C. Mizer, Head of the Justice Department's Civil Division add - ed, "Today's settlement is another example of the department's resolve to hold accountable those whose illegal conduct resulted in the financial crisis of 2008. Viewed in conjunction with the previous multibillion-dollar re - coveries that the department has obtained for similar conduct, this settlement demonstrates the per- vasiveness of the banking indus- try's fraudulent practices in sell- ing RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing." Several large financial institu - tions have settled with the U.S. Justice Department and state regulatory agencies to resolve claims of mortgage-backed securities fraud: Citigroup for $7 billion in July 2014, JPMorgan Chase for a then-record $13 billion in November 2013, and Bank of America for a record $16.65 billion in August 2014. Goldman's settlement will mark the fourth-largest RMBS settle - ment to date. National Association of Federal Credit Unions (NAFCU) EVP of Government Affairs and General Counsel Carrie Hunt said in response to news that the NCUA will receive $575 mil - lion from the January Goldman Sachs Group settlement, bringing NCUA legal recoveries to a total of more than $3 billion: "NAFCU and our members appreciate NCUA's persistence in seek - ing recoveries relative to faulty mortgage-backed securities sold to corporate credit unions," Hunt stated. "We continue to urge the agency to remain steadfast in its legal recovery efforts and to be completely transparent as to how the monies recovered will be returned to credit unions." In addition to the settlement, Goldman also agreed to be held accountable for the statement of facts, which describes how the firm made "false and misleading representations to prospective investors about the character - istics of the loans it securitized and the ways in which Goldman would protect investors in its RMBS from harm," the Justice Department stated. Here are the top three state - ments: • Goldman told investors in of- fering documents that "[l]oans in the securitized pools were originated generally in accor- dance with the loan originator's underwriting guidelines," other than possible situations where "when the originator identi - fied 'compensating factors' at the time of origination." But Goldman has today acknowl- edged that, "Goldman received information indicating that, for certain loan pools, signifi- cant percentages of the loans reviewed did not conform to the representations made to investors about the pools of loans to be securitized." • Specifically, Goldman has now acknowledged that, even when the results of its due diligence on samples of loans from those pools "indicated that the un - sampled portions of the pools likely contained additional loans with credit exceptions, Goldman typically did not . . . identify and eliminate any additional loans with credit exceptions." Goldman has acknowledged that it "failed to do this even when the samples included significant numbers of loans with credit exceptions." • Goldman's Mortgage Capital Committee, which included senior mortgage department personnel and employees from Goldman's credit and legal departments, was required to approve every RMBS issued by Goldman. Goldman has now acknowledged that "[t]he Mortgage Capital Committee typically received . . . summa - ries of Goldman's due diligence results for certain of the loan pools backing the securitiza- tion," but that "[d]espite the high numbers of loans that Goldman had dropped from the loan pools, the Mortgage Capital Committee approved every RMBS that was pre - sented to it between December 2005 and 2007." As one ex- ample, in early 2007, Goldman approved and issued a sub- prime RMBS backed by loans originated by New Century Mortgage Corporation, after Goldman's due diligence process found that one of the loan pools to be securitized included loans originated with "[e]xtremely aggressive under - writing," and where Goldman dropped 25 percent of the loans from the due diligence sample on that pool without reviewing the unsampled 70 percent of the pool to deter - mine whether those loans had similar problems. "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." —Stuart F. Delery, Acting Associate Attorney General, Department of Justice

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