Goldman Sachs, Wells Fargo Sued by Regulator

(CN) - Goldman Sachs and Wells Fargo ignored underwriting standards when selling or issuing mortgage-backed securities, a U.S. regulator claims in court.

As liquidating agent of Southwest Corporate Federal Credit Union, the National Credit Union Administration Board filed separate actions in Manhattan Federal Court Tuesday, accusing the banks of violating state and federal securities law when they underwrote and sold the securities.

The National Credit Union Administration is an independent government agency that charters and regulates federal credit unions, among other things.

It claims Goldman Sachs, GS Mortgage Securities Corp. and Wachovia Capital Markets "systematically abandoned" their underwriting guidelines with certain residential mortgage-backed securities, which "were significantly riskier than represented."

Residential mortgage-backed securities, or RMBS, are securities that use a pool or pools of home mortgage loans as collateral.

Southwest allegedly bought $40 million of the "highest-rated" tranches of RMBS from Goldman Sachs and more than $25.5 million from Wachovia, the regulator says. (Wachovia merged with Wells Fargo & Co. in 2009 and is now known as Wells Fargo Advisors.)

Those investments "suffered a significant drop in market value" during the 2008 financial crisis, according to the lawsuits. Their triple-A rating dropped to "well below investment grade" just a few years after Southwest bought them, the regulator claims.

Southwest, once one of the nation's largest corporate credit unions, was forced into conservatorship and then bankruptcy when borrowers began losing their homes to foreclosure.

"The failure to adhere to underwriting standards directly contributed to the sharp decline in the quality of mortgages that became part of mortgage pools collateralizing RMBS," the board claims. "At the time of purchase, Southwest was not aware of the untrue statements or omissions of material facts in the offering documents of the RMBS. If Southwest had known about the originators' pervasive disregard of underwriting standards - contrary to the representations in the offering documents - they would not have purchased the certificates."

The board seeks unspecified damages and a jury trial. It is represented by David Wollmuth of Wollmuth Maher & Deutsch in Manhattan.

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