This week’s Department of Justice “Catch of the Week” goes to latest members of the Billion Dollar Mortgage Fraud Club — Goldman Sachs and Wells Fargo Bank. In separate ten-figure settlements they entered into this past Monday and last Friday respectively, each agreed to settle charges of various mortgage fraud machinations. Goldman Sachs agreed to pay $5.06 billion for misconduct in its sale of residential mortgage-backed securities (RMBS). And Wells Fargo agreed to pay $1.2 billion for misconduct in its mortgage lending practices. See DOJ Press Releases here and here.
According to Acting Associate Attorney General Stuart Delery, the Goldman Sachs settlement holds the bank “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.” He highlighted that the “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.”
Department of Justice Civil Chief Benjamin Mizer spoke similarly of the government’s commitment to “hold accountable those whose illegal conduct resulted in the financial crisis of 2008.” He pointed to the Goldman Sachs settlement as just the latest in a string of multibillion-dollar recoveries against other banks for similar misconduct. These settlements demonstrate “the pervasiveness of the banking industry’s fraudulent practices in selling RMBS, and the power of the Financial Institutions Reform, Recovery and Enforcement Act as a tool for combatting this type of wrongdoing.” A parade of other regulators joined the chorus of condemnation against Goldman Sachs for contributing “to an international financial crisis that people across the country . . . continue to struggle to recover from.”
The Wells Fargo settlement concerned the bank’s certification of loans as eligible for Federal Housing Administration (FHA) Mortgage Insurance when they were not, and its failure to disclose thousands of faulty mortgage loans to the Department of Housing and Urban Development (HUD). As a result of this misconduct, the government had to pay FHA insurance claims when those loans defaulted. The $1.2 billion settlement is the largest recovery for loan origination violations in FHA history. Though according to HUD Secretary Julián Castro, “this monetary figure can never truly make up for the countless families that lost homes as a result of poor lending practices.”
Manhattan U.S. Attorney Preet Bharara put it even more bluntly, referring to Wells Fargo’s “reckless underwriting,” “shoddy underwriting practices,” and “drive to maximize profits.” In short, “while Wells Fargo enjoyed huge profits from its FHA loan business, the government was left holding the bag when the bad loans went bust,” blatantly exploiting the government program “designed to help millions of Americans realize the dream of home ownership.”
Notably, as part of their settlements, both banks acknowledged their respective wrongdoing. Goldman Sachs admitted making false and misleading representations to prospective investors about the characteristics of the loans it securitized and the ways the bank would protect investors. Wells Fargo likewise admitted its failure to come clean on its HUD certifications of FHA insurance eligibility for many of its home mortgage loans and the resulting government losses.
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