Secondary Mortgage Market and Securitizations

One topic that was brought up a good amount in class was the difference between predatory and subprime lending. They are different because predatory lending is purposely harmful to the borrower while subprime lending is lending to someone with less than good credit. The false representation that this essay will discuss is Goldman Sachs underwriting process during the time of their scandal.
Underwriting is a big part in giving loans. This is because the underwriting guidelines are used to discern whether or not a person would be able to pay off a loan. When we specifically look at the case of Goldman Sachs, they more or less took out this whole process of underwriting and tried to play it off as if they hadn't. As found in the Statement of Facts, Goldman Sachs told investors that, "Certain loan originators applied underwriting guidelines that were intended primarily to assess the borrower's ability and, in some cases, willingness to repay the debt and the adequacy of the mortgage property as collateral for the loans". This statement reiterates how underwriting guidelines are used in assessing the borrower's ability to repay and a few other points like collateral if there would be a default. Such procedures regarding the underwriting guideline that Goldman stated that they abided by was the Home Ownership and Equity Protection Act (HOEPA), state and federal predatory lending, origination practices by jurisdiction, historical loan level loss experience and a few others. This specific representation that Goldman Sachs tried to play off can and should be considered predatory lending rather than subprime lending. This is because Goldman Sachs did not follow regulatory underwriting guidelines, and had the sole purpose to sell as many loans as possible to make more money. This will be further explained in the next paragraph.
Also in the Statement of Facts is a quote saying that, "The securitization sponsor or originator (which, in many instances, was Goldman) represented that the loans had been originated in compliance with federal, state, and local laws and regulations." Goldman told investors that they had a process for reviewing and approving originators, when in fact they were the "originators" themselves. Again, we can see a trend of how Goldman Sachs implies that they are following regulations, when in fact, they are skipping these regulations to assume the image that their loans are above par so that more people will buy them. Goldman even went as far as to say that the originators were subject to Goldman's "counterparty qualification" process, which consists of many strict guidelines including Goldman having an on-site visit with the originator to review their goals, quality control and other variables. Overall, there were just so many lies about the underwriting process that was expressed to investors that could be considered predatory.
By making their mortgage loans look as if they are securitized (even when they were subprime), Goldman Sachs was able to sell billions of dollars' worth of these residential-mortgage backed securities (RMBS). Although the loans were subprime, Goldman Sachs is guilty of predatory lending because of their harmful intentions to make money off of their investors. Between the lying of their regulatory procedures to the selling of the un-securitized loans, Goldman Sachs misrepresented a lot of information to their investors, which hopefully, this essay helped bring to light.


Sources:
https://www.justice.gov/opa/file/839901/download (Statement of Facts)