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Feds Sue Financial Institutions Over Bad Mortgages

Feds Sue Financial Institutions Over Bad Mortgages

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Published by FindLaw
The Federal Housing Finance Agency has filed lawsuits against 17 financial institutions alleging violations of federal securities law and common law in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. The FHFA claims that the marketing and sales descriptions provided by the financial institutions misrepresented the nature and risk of the securities in question.
The Federal Housing Finance Agency has filed lawsuits against 17 financial institutions alleging violations of federal securities law and common law in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. The FHFA claims that the marketing and sales descriptions provided by the financial institutions misrepresented the nature and risk of the securities in question.

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Published by: FindLaw on Sep 02, 2011
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05/23/2013

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 UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORKFEDERAL HOUSING FINANCE AGENCY,AS CONSERVATOR FOR THE FEDERALNATIONAL MORTGAGE ASSOCIATIONAND THE FEDERAL HOME LOANMORTGAGE CORPORATION,Plaintiff,-against-GOLDMAN, SACHS & CO., GSMORTGAGE SECURITIES CORP.,GOLDMAN SACHS MORTGAGECOMPANY, THE GOLDMAN SACHSGROUP, INC., GOLDMAN SACHS REALESTATE FUNDING CORP., PETER C.ABERG, HOWARD S. ALTARESCU,ROBERT J. CHRISTIE, KEVIN GASVODA,MICHELLE GILL, DAVID J. ROSENBLUM,JONATHAN S. SOBEL, DANIEL L.SPARKS, AND MARK WEISS
,
 Defendants.
___ CIV. ___ (___)COMPLAINTJURY TRIAL DEMANDED
 
 i
TABLE OF CONTENTSPage
NATURE OF ACTION ...................................................................................................................1
 
PARTIES .........................................................................................................................................9
 
The Plaintiff and the GSEs
...................................................................................................9
 
The Defendants
..................................................................................................................10
 
JURISDICTION AND VENUE ....................................................................................................13
 
FACTUAL ALLEGATIONS ........................................................................................................14
 
I.
 
The Securitizations.............................................................................................................14
 
A.
 
Residential Mortgage-Backed Securitizations in General .....................................14
 
B.
 
The Securitizations at Issue in This Case ..............................................................16
 
C.
 
The Securitization Process .....................................................................................19
 
1.
 
Goldman Sachs Mortgage Company Pools Mortgage Loans inSpecial Purpose Trusts ...............................................................................19
 
2.
 
The Trusts Issue Securities Backed by the Loans ......................................21
 
II.
 
The Defendants’ Participation in the Securitization Process .............................................25
 
A.
 
The Role of Each Defendant ..................................................................................25
 
1.
 
Goldman, Sachs & Co................................................................................25
 
2.
 
GS Mortgage Securities Corp. ...................................................................26
 
3.
 
Goldman Sachs Mortgage Company .........................................................27
 
4.
 
The Goldman Sachs Group, Inc. ................................................................28
 
5.
 
Goldman Sachs Real Estate Funding Corp. ...............................................29
 
6.
 
The Individual Defendants .........................................................................29
 
B.
 
Defendants Failed To Conduct Proper Due Diligence ..........................................32
 
III.
 
The Registration Statements and the Prospectus Supplements..........................................37
 
A.
 
Compliance with Underwriting Guidelines ...........................................................37
 
 
 iiB.
 
Statements Regarding Occupancy Status of Borrower ..........................................40
 
C.
 
Statements Regarding Loan-to-Value Ratios .........................................................43
 
D.
 
Statements Regarding Credit Ratings ....................................................................45
 
IV.
 
Falsity of Statements in the Registration Statements and Prospectus Supplements ..........47
 
A.
 
A Review of Loan-Level Data Indicates That the Statistical Data Providedin the Registration Statements and Prospectus Supplements ConcerningOwner Occupancy and LTV Ratios Was Materially False ....................................47
 
1.
 
Owner-Occupancy Data Was Materially False ..........................................48
 
2.
 
LTV Data Was Materially False ................................................................50
 
B.
 
The Originators of the Underlying Mortgage Loans SystematicallyDisregarded Their Underwriting Guidelines .........................................................54
 
1.
 
Government Investigations Have Confirmed That the Originatorsof the Loans in the Securitizations Systematically Failed to Adhereto Their Underwriting Guidelines ..............................................................55
 
2.
 
The Collapse of the GSE Certificates’ Credit Ratings FurtherIndicates that the Mortgage Loans Were not Originated inAdherence to the Stated Underwriting Guidelines ....................................64
 
3.
 
The Surge in Mortgage Delinquencies and Defaults FurtherDemonstrates that the Mortgage Loans Were Not Originated inAdherence to the Stated Underwriting Guidelines ....................................66
 
V.
 
Goldman Sachs Knew Its Representations Were False .....................................................68
 
A.
 
Evidence Regarding Goldman’s Due Diligence ....................................................69
 
1.
 
Goldman’s Due Diligence Benefitted From a Direct Window Intothe Originators’ Practices ...........................................................................69
 
2.
 
Goldman Had Actual Knowledge, on a Daily Basis, of the Numberof Non-Performing Loans ..........................................................................72
 
B.
 
Other Evidence Of Goldman’s Willingness to Capitalize on Its UniqueKnowledge at the Expense Of Investors ................................................................75
 
1.
 
Goldman Began Shorting Its Own Offerings Beginning in 2006 ..............76
 
2.
 
Goldman’s Targeted Campaign to “Put Back” Defective Loans toOriginators Demonstrates That It Knew the Targeted Originators’Loans Breached Underwriting Guidelines .................................................79