General Electric has been slapped with a $1.5 billion civil penalty to resolve claims involving subprime mortgage originations during the run-up to the financial crisis. The penalty was sought by the federal government under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
The claims involve GE’s now-defunct mortgage unit, WMC Mortgage. According to the Justice Department, WMC, GE and their affiliates misrepresented the quality of WMC’s loans and the extent of the originator’s internal quality and fraud controls.
“The financial system counts on originators, which are in the best position to know the true condition of their mortgage loans, to make accurate and complete representations about their products,” said Assistant Attorney General Jody Hunt. “The failure to disclose material deficiencies in those loans contributed to the financial crisis. As today’s resolution demonstrates, the Department of Justice will continue to employ FIRREA as a powerful tool for protecting our financial markets against fraud.”
General Electirc Capital Corporation (GECC) acquired subprime originator WMC in 2004. Between 2005 and 2007, WMC originated more than $65 billion in mortgage loans, selling the vast majority to investment banks – which, in turn, issued and sold residential mortgage-backed securities backed by WMC loans to investors. The Justice Department alleged that the majority of WMC loans sold for inclusion in RMBS between 2005 and 2007 didn’t comply with WMC’s representations about the loans. Some of those representations, the DOJ alleged, were reviewed by, approved by, or made with the knowledge of GE or GECC personnel.
“Investors, including federally insured financial institutions, suffered billions of dollars in losses as a result of WMC’s fraudulent origination and sale of loans for inclusion in RMBS,” the DOJ said.
DOJ also alleged that between 2005 and 2007, WMC attempted to hike profits by increasing originations. WMC loan analysts responsible for underwriting the mortgages were allegedly encouraged to approve loans to meet volume targets, even when the loan applications didn’t meet the company’s own underwriting guidelines. There were also allegedly “significant deficiencies” in the company’s quality control.
GE did not admit liability when agreeing to the settlement.