Goldman to face lawsuit over mortgage bonds

by Ryan Smith31 Mar 2014
Goldman Sachs will have to face a lawsuit alleging that it misled investors about the quality of mortgage-backed securities it sold, a federal judge has ruled.

Goldman had moved for the suit, filed by Detroit’s police and firefighters’ pension fund, to be dismissed, according to a Reuters report. The suit accused Goldman of misrepresenting the standards it used to qualify mortgage borrowers whose loans were bundled into securities and bought by the fund, Reuters reported.

The pension fund bought about $1.8 million of the securities. Offering documents from Goldman said lenders reviewed borrowers’ financial health, when in reality mortgages pooled into the fund had been issued without proper financial vetting, according to the lawsuit.

The lawsuit also claimed that lenders exaggerated borrowers’ incomes and that appraisers inflated property values, according to Reuters.

Goldman argued that its underwriting policies were merely guidelines and that lenders were free to deviate from them, Reuters reported. But U.S. District Judge Miriam Cedarbaum ruled that Goldman’s offering documents were “affirmatively misleading” and that making occasional exceptions to underwriting standards was not the same thing as abandoning them altogether.
 

COMMENTS

  • by Wm Matz | 3/31/2014 1:41:57 PM

    Let's hope that these investor lawsuits finally bring some accountability to the perpetrators of this massive mortgage fraud. By relying on AAA ratings that were based on illusory insurance that dwarfed the assets of insurers such as AIG, Goldman and other deliberately created a false sense of the safety of these RMBS. Without that purported level of safety pension funds would have been prohibited from investing.

    The vast expansion of investment funds due to the false safety ratings fueled an almost insatiable demand for mortgages to fill the RMBS. That, in turn, led to virtual abandonment of the underwriting standards, as the judge rightly notes, for which Goldman should be held accountable.

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