State gets subprime loan cuts for 700
Reaches $60m accord with Wall Street giant; Bank played big role in packaging of debt
In the first settlement of its kind in the country, Massachusetts Attorney General Martha Coakley has reached a $60 million agreement with a Wall Street investment bank that helped facilitate the frenzy of subprime lending that saddled so many homeowners with mortgages they could not afford to pay.
Wall Street giant Goldman Sachs Group agreed to reduce the size of subprime loans for some 700 Massachusetts homeowners by up to 35 percent, Coakley said yesterday. The investment bank played a key role in perpetuating sales of subprime mortgages by packaging the loans into securities that were sold to investors, with the proceeds used to fund new rounds of mortgages.
"This is a landmark case. It is one of the few times we've seen somebody who didn't actually originate the loans being held accountable," said Guy Cecala, the chief executive of Inside Mortgage Finance, a mortgage industry newsletter. "It is a significant precedent. The question begs to be asked: If Massachusetts can do it with Goldman Sachs, who else can they do it with?"
The settlement stems from an investigation launched in 2007 into the subprime mortgage industry. It began with firms that made the high-cost loans to borrowers, and worked its way up to focus on the banks that had a crucial role in facilitating more of the loans. Coakley is trying to determine if the banks knew, or should have known, some of the loans were unaffordable, and whether the loans should have been made to homeowners and subsequently sold to investors. Coakley would not give details on the ongoing investigation.
"We've made the determination, and our courts have agreed, that many of these loans were unfair. They were destined to fail," she said. "Our focus is on trying to get relief for homeowners and for Massachusetts."
Goldman Sachs did not admit to any wrongdoing as part of the settlement. Company spokesman Michael DuVally said Goldman Sachs is "pleased to resolve this matter."
As part of the settlement, Goldman Sachs will reduce the outstanding balances of subprime mortgages for 714 homeowners, most of whom live in Boston, Brockton, Lawrence, Springfield, and Worcester. The reduced balances will allow homeowners to either sell their homes or refinance into historically low interest rates in the open market.
Goldman Sachs ended up owning the loans from the pools of securities it had created. Homeowners could see a reduction in their first mortgages of up to 35 percent and up to a 100 percent reduction in second mortgages. The reductions depend on home values and the homeowner's financial situation.
Reducing those loan amounts will cost Goldman Sachs an estimated $50 million. The company also agreed to have its subsidiary, Litton Loan Servicing LP, help qualified borrowers who are in trouble on their loans avoid foreclosure. Goldman will also pay $10 million to the state.
Housing advocates lauded the settlement for focusing on financial institutions that played a key part in the nation's housing crisis, which prompted wide-scale inflation in the housing market and then a crash that led to a worldwide financial collapse. At the height of the subprime market in 2006, 82.4 percent of subprime loans were packaged with other loans into securities that were sold to investors, according to Inside Mortgage Finance.
That year, Goldman Sachs was ranked 15th in the number of such mortgage-backed securities it created, while Morgan Stanley was ranked 11th, and Wells Fargo & Co., 13th. Many of the top issuers, like Countrywide Financial Corp. and New Century Financial Corp., are either out of business or have been acquired by other banks.
The companies that issued mortgage-backed securities "played a central role in creating the crisis and have an important role in solving it," said Eric Halperin, director of the Washington office for the Center for Responsible Lending. "Other states will no doubt look to this latest settlement as a way to hold securitizers responsible for the foreclosures occurring in their states."
Andrew Jakabovics, associate director for housing and economics for the Center for American Progress, praised the settlement for assuring that homeowners see a reduction in the principal of their loans. He said such efforts are more likely to help struggling homeowners avoid foreclosure than simply reducing their interest rates.
By reducing the amount of principal that homeowners owe, "I think you are getting people's head above water again," Jakabovics said.
Jenifer McKim can be reached at jmckim@globe.com. 
