We know that Goldman Sachs got a Wells Notice from the SEC in February, which means that they’re being investigated for something. We just don’t know what for… yet.What we do know (from the notice) is that the deal being investigated took place in late 2006 and was worth about $1.3 billion. It also said the deal was made of subprime residential mortgage loans.
Using that information, Fortune went digging — and if they’re right then Goldman is going to catch fire for “Fremont Home Loan Trust 2006-E (FHLT 2006-E), a bundle of more than 5,000 mortgages that has cost investors, including mortgage guarantor Freddie Mac and by extension U.S. taxpayers, an estimated $545 million.”
Fortune reports that Fremont is the only deal Goldman did that fits the criteria laid out in the Wells Notice. Another piece of evidence they’re citing is the fact that the Federal Home Finance Agency brought a lawsuit against Goldman for FHLT 2006-E (and other loans), alleging that an outside auditor told the bank the loans were no good, but Goldman went ahead and sold them anyway.
The SEC would neither confirm nor deny any of this.
The details are not pretty. Just look at these facts (from Fortune):
- “…652 of the loans in FHLT 2006-E, or 13%, were made to borrowers with credit scores of 549 or worse…”
- “Nearly 37% of the loans in the trust, or 1,857, were made to borrowers who were never asked to prove their income.”
- “More than a quarter of the loans were made to borrowers in California, one of the most overheated real estate markets at the time. Yet, the California loans in Fremont’s portfolio had an average size of more than $330,000 to borrowers with credit scores that on average didn’t break the mid-600s…”
- “…just 12 months after Goldman sold the deal, 32% of the mortgages in the trust had gone bad. “
- “Over 350 had entered foreclosure. Borrowers in another 785 mortgages hadn’t made a payment in over a month…”
- “…the deal’s prospectus that Goldman assembled and distributed to investors, and filed with the SEC, said that there was only one home loan out of 5,012 in the Fremont trust, or 0.01%, in which a borrower had taken out more than their house was worth. But an audit conducted for the FHFA suit found that at least 1,179 loans in FHLT 2006-E, or 23.5%”
- “The suit alleges that Goldman also hid the number of loans in the Fremont trust that were made to real estate investors, which are generally considered riskier than a loan to someone who intends to live in a house themselves. Goldman’s pitch claimed that just under 14% of the loans in FHLT 2006-E were made to investors. In fact, that number was over 24%.”