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Goldman Closes FHFA's PLS Lawsuit for $3.15B

Zacks Equity Research

The Goldman Sachs Group, Inc. (GS) finally ended the legal tussle it was embroiled in since 2011 with the Federal Housing Finance Agency ('FHFA),' the conservator for Freddie Mac (FMCC) and Fannie Mae (FNMA). FHFA announced a $1.2 billion settlement that marked the 16th settlement of the 18 PLS (private-label securities) lawsuits that FHFA filed in 2011. The PLS lawsuits relate to the sale of faulty mortgage back securities to these government sponsored enterprises (GSE.V) prior to the financial crisis.

The Settlement

Goldman will shell out $3.15 billion for purchasing and releasing residential mortgage-backed securities related to the lawsuit claims. Of the total amount, the company will pay around $2.15 billion to Freddie Mac while Fannie Mae will receive the remaining $1 billion.

The settlement amount of $1.2 billion excludes the current value of the securities that will be bought back from Fannie and Freddie. In its release, FHFA mentioned that this settlement “effectively makes Fannie Mae and Freddie Mac whole on their investments in the securities at issue.”

The Probe

Many financial institutions resorted to inappropriate, misleading, aggressive and fraudulent methods to boost their mortgage operations during the pre-crisis period that fueled the sub-prime mortgage crisis. Consequently, Freddie Mac and Fannie Mae reached the brink of bankruptcy and the government intervened to rescue these lenders.

In order to avoid such dire situations in the future, the regulators started implementing stringent regulations and in 2011 the FHFA sued 18 financial organizations including Goldman, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Deutsche Bank AG for selling faulty mortgage-backed securities to Freddie Mac and Fannie Mae that caused investors severe losses.

The Goldman Part

FHFA alleged that Goldman have violated Federal and District of Columbia securities laws while it sold more than  $11.1 billion in residential mortgage-backed securities (GSE Certificates) to Fannie Mae and Freddie Mac between 2005 and 2007.

Per the lawsuit, the sale of these securities was in accordance with registration statements that contained false or misguiding facts while certain other material facts were omitted. The registration statements falsely claimed that the underlying mortgage loans and properties fulfilled the underwriting guidelines and standards. Also, the credit quality of such loans was weaker than what was stated.

Gradually, the mortgage loans underlying the GSE Certificates witnessed defaults and delinquencies at significantly higher rate, which led Fannie Mae and Freddie Mac to incur huge losses.


The FHFA continues to exhibit efforts in successfully resolving the issues and safeguarding the interest of investors. There remains pending PLS lawsuits against HSBC Holdings Plc, Nomura Holdings Inc and Royal Bank of Scotland Group Plc.

The latest settlement will come as a relief for Goldman, resolving a major legal hassle, which has been an overhang for this banking behemoth for quite some time.

Goldman currently sports a Zacks Rank #2 (Buy).

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