Buyers of mortgage-backed securities, mostly banks, pension funds and other big investors, made money from the investments if the underlying debt was paid off. But as homeowners started falling behind on their mortgages and defaulted in droves in 2007, the securities failed and their buyers lost billions.
Today the National Credit Union Administration (NCUA) sued Goldman Sachs & Co. for more than $491 million in damages over losses incurred by two failed credit unions that purchased mortgage-backed securities underwritten by the investment bank.
The complaint filed in U.S. District Court in Los Angeles is the latest lawsuit brought by the federal regulatory agency against a major bank as it seeks to recover billions in losses related to risky mortgage-backed securities that brought down credit unions in recent years.
In the complaint, which also names as defendants several issuers of mortgage-backed securities, regulators claim that the documents used in offering the securities contained untrue statements or omissions as to how risky the investments were.
U.S. Central Federal Credit Union in Lenexa, Kan., and Western Corporate Federal Credit Union in San Dimas, Calif., purchased the mortgage-backed securities, believing the risk of loss was minimal because virtually all of the securities had a triple-A rating. However, these loans represented a substantial risk of losses, the NCUA claims. And when the investments' market value plummeted, the two largest U.S. credit unions failed.
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