FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ALLSTATE INSURANCE COMPANY and ALLSTATE LIFE INSURANCE COMPANY, Plaintiffs, -againstGOLDMAN, SACHS & COMPANY; GOLDMAN SACHS GROUP, INC.; GOLDMAN SACHS MORTGAGE COMPANY; and GS MORTGAGE SECURITIES CORPORATION, Defendants. Index No. SUMMONS

TO:

GOLDMAN, SACHS & COMPANY 200 West Street New York, NY 10282

GOLDMAN SACHS MORTGAGE COMPANY 200 West Street New York, NY 10282 GS MORTGAGE SECURITIES CORPORATION 200 West Street New York, NY 10282

GOLDMAN SACHS GROUP, INC. 200 West Street New York, NY 10282

YOU ARE HEREBY SUMMONED to answer the complaint in this action and to serve a copy of your answer on Plaintiffs attorneys within twenty (20) days after the service of this summons, exclusive of the day of service (or within thirty (30) days after the service is complete if this summons is not personally delivered to you within the State of New York). In case of your failure to appear, judgment will be taken against you by default for the relief demanded in the complaint. Plaintiffs designate New York County as the place of trial. The basis of the venue designated is that Defendants do business in or derive substantial revenue from activities carried out in this County. The Defendants engaged in significant business activity in this County as it pertains to the securitization of the mortgage loans at issue.

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ALLSTATE INSURANCE COMPANY and ALLSTATE LIFE INSURANCE COMPANY, Plaintiffs, -againstGOLDMAN, SACHS & COMPANY; GOLDMAN SACHS GROUP, INC.; GOLDMAN SACHS MORTGAGE COMPANY; and GS MORTGAGE SECURITIES CORPORATION, Defendants. Index No. COMPLAINT

TABLE OF CONTENTS NATURE OF ACTION ...................................................................................................................1 PARTIES .........................................................................................................................................6 JURISDICTION AND VENUE ......................................................................................................8 BACKGROUND .............................................................................................................................9 A. B. C. The Mechanics of Mortgage Securitization .............................................................9 Securitization of Mortgage Loans: The Traditional Model ..................................12 The Systemic Violation Of Underwriting And Appraisal Standards In The Mortgage Securitization Industry ..........................................................................13

SUBSTANTIVE ALLEGATIONS ...............................................................................................17 I. THE OFFERING MATERIALS UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS .................................................................................................17 A. B. C. D. E. F. G. H. II. Goldmans Misrepresentations Regarding Underwriting Standards and Practices .................................................................................................................17 Goldmans Misrepresentations Regarding Due Diligence Results........................22 Owner-Occupancy Statistics ..................................................................................23 Goldmans Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios .............................................................................................24 Goldmans Misrepresentations Regarding The Sufficiency of Borrower Income....................................................................................................................25 Goldmans Misrepresentations Regarding Credit Ratings ....................................26 Goldmans Misrepresentations Regarding Credit Enhancement ...........................28 Goldmans Misrepresentations Regarding Underwriting Exceptions ...................29

EVIDENCE THAT ALL OF GOLDMANS REPRESENTATIONS WERE UNTRUE AND MISLEADING ........................................................................................30 A. Evidence of the Securities High Default Rates and Plummeting Credit Ratings ...................................................................................................................30

B. C. D. E. F.

Loan-Level Evidence That The Mortgaged Properties Were Not OwnerOccupied ................................................................................................................32 Evidence That The LTV And CLTV Ratios Were Materially Misrepresented .......................................................................................................35 Evidence That Goldmans Due Diligence Identified Loans That Did Not Meet The Stated Underwriting Guidelines ............................................................40 Evidence That The Ratings Were Meaningless .....................................................42 Originator-Specific Evidence That The Loans Were Generated Outside The Disclosed Guidelines ......................................................................................46 (1) (2) (3) (4) (5) (6) IndyMac .....................................................................................................48 Long Beach ................................................................................................53 Fremont ......................................................................................................56 Aames ........................................................................................................62 American Home Mortgage Corporation ....................................................64 NovaStar ....................................................................................................68

III.

EVIDENCE THAT GOLDMAN KNEW ITS REPRESENTATIONS WERE UNTRUE AND MISLEADING ........................................................................................70 A. Evidence Regarding Goldmans Due Diligence ....................................................71 (1) (2) Goldmans Due Diligence Benefitted From A Direct Window Into The Originators Practices .........................................................................71 Third-Party Due Diligence Data Confirms Goldman Was Made Aware, On A Daily Basis, Of The Number Of Non-Performing Loans ..........................................................................................................75

B.

Other Evidence Of Goldmans Willingness To Capitalize On Its Unique Knowledge At The Expense Of Investors .............................................................84 (1) (2) Goldman Began Shorting Its Own Offerings In 2006 And Into 2007............................................................................................................84 Goldmans Targeted Campaign To Put Back Defective Loans To Originators Demonstrates That It Knew The Targeted Originators Loans Violated Underwriting Guidelines ..................................................88

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C. D. IV.

Numerous Government Investigations Have Confirmed Goldman Acted With Scienter .........................................................................................................92 Further Evidence that Goldman Knew the Appraisals Were Inflated ...................93

ALLSTATES DETRIMENTAL RELIANCE AND DAMAGES ...................................94

FIRST CAUSE OF ACTION ......................................................................................................100 SECOND CAUSE OF ACTION .................................................................................................101 THIRD CAUSE OF ACTION .....................................................................................................101 FOURTH CAUSE OF ACTION .................................................................................................103 PRAYER FOR RELIEF ..............................................................................................................105 JURY TRIAL DEMANDED .......................................................................................................106

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Plaintiffs Allstate Insurance Company and Allstate Life Insurance Company (together, Allstate), by and through their attorneys, bring this action against Goldman, Sachs & Company, Goldman Sachs Group, Inc., Goldman Sachs Mortgage Company, and GS Mortgage Securities Corporation (together, Defendants or Goldman), and allege as follows: NATURE OF ACTION 1. This action arises out of Goldmans fraudulent sale of residential mortgage-

backed securities (RMBS or the Certificates) to Allstate. Allstate invested more than a hundred million dollars in Goldmans securities in reliance on Goldmans representations regarding the quality of those Certificates and the residential mortgages underlying them (the Mortgage Loans). Goldman knew these types of securities were, to use Goldmans own wordswords recently revealed to the public by the numerous governmental investigations into Goldmans role in the markets collapsejunk, dogs, crap, and lemons. 2. To offload the securities it knew were crap, Goldman made numerous

misrepresentations to Allstate regarding the features of the Mortgage Loans. These misrepresentations were repeated in registration statements, prospectuses, prospectus supplements, free writing prospectuses, term sheets, and other draft and final written materials (both herein and in the Exhibits, the Offering Materials) provided to Allstate in connection with the Certificates. For example: (i) Underwriting guidelines. The Offering Materials represented that the

loans were originated according to certain underwriting guidelines. These guidelines were purportedly intended to ensure that only loans that the borrower could repay would be included in the pools underlying the Certificates. In fact, Goldman knew that lenders had systematically abandoned the stated underwriting guidelines, producing loans without regard to the likelihood of repayment. 1

(ii)

Purpose and Use of Exceptions. Similarly, the Offering Materials

represented that loans that did not meet certain criteria were approved as exceptions only if the loans showed countervailing features that made up for negative aspects of the risk profile. In fact, exceptions were not based on legitimate compensating factors, and instead were used as a way to increase loan volume by circumventing the applicable underwriting guidelines. (iii) Owner Occupancy Statistics. The Offering Materials made specific

representations regarding the percentage of borrowers who would be occupying the property being mortgageda key risk metric given that borrowers are less likely to walk away from properties they live in, as compared to properties being used as a vacation home or as an investment. Analytical tools recently made available to investors confirm that, in truth, of the loans underlying the Certificates, a far greater percentage than that represented by Goldman were given to borrowers who did not live in the homes that secured the mortgages in question. (iv) Loan-to-Value Ratios. The Offering Materials represented that the loans

had specific loan-to-value (LTV) and combined loan-to-value (CLTV) ratios. The LTV and CLTV represent the size of the borrowers obligation as compared to the value of the property being used as collateral. The CLTV is the LTV after all loans are considered, not just the first mortgage. These are important risk metrics, because borrowers who have substantial equity in their homes are less likely to default. Additionally, the larger the equity cushion that borrowers have, the greater the likelihood of repayment to lenders upon foreclosure. Analytical tools recently made available to investors confirm that the Offering Materials vastly overstated the value of the collateral being included in the loan pools, and hid additional liens that had been placed on the properties.

3.

These and other key representations were false, and Goldman knew it. As the

United States Senate Permanent Subcommittee on Investigations (SPSI) found in its April 2011 report, Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (SPSI Report), Goldman was keenly aware of the poor quality of many of the loan pools, and thus it knew [the loan pools] were likely to incur abnormally high rates of default. (SPSI Report at 487, 513 (emphasis added).) 4. As the SPSI found, Goldman underwrote securities using loans from subprime

lenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors across the United States and around the world. (Id. at 11.) Many of the loans came from lenders such as Long Beach, IndyMac, and Fremontwho are among the Office of the Comptroller of the Currencys Worst Ten in the Worst Ten list of originators. (Id. at 239.) Goldman knew that these now-notorious lenders were selling loans outside their stated guidelines. Previously undisclosed materials from Goldmans third-party due diligence firm, Clayton Holdings, confirm that Goldman was aware, on nearly a real-time basis, of how many loans were being identified by its due diligence reviews as failing to meet the stated guidelines. Yet Goldman waived those defective loans into securitizations such as those at issue here. 5. Even as the market started to turn, and Goldman gave the internal dictate to

reduce its own exposure to the U.S. housing market, the firm kept right on packaging up, underwriting, and selling mortgage-related securities. (William D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World, 2011.) Goldman did so because, by misrepresenting the quality of the loans, it was able to reap millions in fees for the numerous roles it played along the securitization chain.

6.

Goldman also did so despite what it knew about the Mortgage Loans because it

was able, through the process of securitization, to move the loans off of its booksand off the books of lenders who were indebted to Goldman. Goldman provided many originators with warehouse lines of credit. The originators owed Goldman billions, which gave it incentive to move the originators mortgages down the securitization pipeline, and thus ensure that the originators could repay Goldmans lines of credit. As the Financial Crisis Inquiry Commission (FCIC) found in its January 2011 report (FCIC Report), Goldman, through its cheap warehouse financing of subprime loans and other fraudulent business practices, multiplied the effects of the collapse in subprime. (FCIC Report at 142.) 7. Goldman not only stood to benefit from the fees the securitizations generated, but

also positioned itself to cash in even more when the true nature of the junk was revealed. This is because Goldman was taking outside bets against many of the same assets and asset types it was securitizing. Of course, Goldman failed to disclose to clients that, at the same time it was recommending investments in Goldman-originated RMBS and CDO securities, it was committing billions of dollars to short the same types of securities, as well as their underlying assets, and even some of the lenders whose mortgage pools were included or referenced in the securities. (SPSI Report at 513, 618.) 8. Goldman was able to engage in such profiteering because it was in prime position

to know the true quality of the loans it was packaging into securities such as the Certificates here. Goldmans longstanding relationships, and its warehouse lending agreements, gave it a direct window into the originators underwriting abandonment. Tellingly, only when the securitization market started to dry up did Goldman confront these lenders with its knowledge of their poor practices. That Goldman forced the same lenders at issue here to repurchase loans Goldman was

stuck with (despite its best efforts) is an admission that the originators relevant to this case were churning out defective loans. That Goldman knew to specifically target the same lenders at issue in this case for repurchase demands is evidence that Goldman knew those lenders had abandoned their guidelines. That Goldman continued to try to securitize these lenders loans even as it was forcing them to repurchase the loans left on Goldmans books confirms Goldmans disregard for the truth. 9. Allstate purchased more than $123 million of Certificates across five different

securitizations from April 2006 to March 2007, in reliance on Goldmans misrepresentations and omissions. These purchases are further detailed in the Exhibits to this Complaint, all of which are incorporated herein. Total Investment $11,850,937.20 $19,789,062.00 $33,000,000.00 $24,999,975.00 $34,050,000.00

Transaction GSAMP Trust 2006-HE7, M2 GSAMP Trust 2006-HE5, M2 GSAMP Trust 2006-S4, A1 GSAMP Trust 2006-S3, A1 GSAA Trust 2006-13, AF2 10.

The systemic (but hidden) abandonment of the disclosed underwriting guidelines

led to soaring default rates in the Mortgage Loans underlying the Certificates, which in turn led to catastrophic losses in market value, revealing the true value of the Certificates to be far less than what Allstate paid. The delinquency rates on the Mortgage Loans underlying Allstates investments are astronomical, far above the delinquency rate one would expect from properlyunderwritten loans. Moreover, despite the fact that all of the Certificates started out with high AAA or AA ratings, all have been downgraded to junk by at least one of the major rating agencies, and their market value has plummeted. The drop in market value of these Certificates, which is indicative of their true value, and the spike in delinquency rates, was not caused by the

downturn in the U.S. housing market, but rather by faulty underwriting of the mortgages themselves. As Senator Carl Levin summarized: Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients. (SPSI Press Release, dated April 24, 2010.) PARTIES 11. The Plaintiffs. Plaintiff Allstate Insurance Company is an insurance company

formed under the laws of, and domiciled in, the State of Illinois, with its principal place of business in Northbrook, Illinois. It is the nations largest publicly held personal-lines insurer, selling property and casualty insurance. Allstate Insurance Company is licensed to do business in New York and writes insurance policies to New York residents. Allstate Insurance Company is a wholly owned subsidiary of Allstate Insurance Holdings, LLC, which is a Delaware limited liability company. Allstate Insurance Holdings, LLC is a wholly owned subsidiary of The Allstate Corporation, which is a Delaware corporation. 12. Plaintiff Allstate Life Insurance Company is an insurance company formed under

the laws of, and domiciled in, the State of Illinois, with its principal place of business in Northbrook, Illinois. It sells life insurance and annuity products. Allstate Life Insurance Company is a wholly owned subsidiary of Allstate Insurance Company. 13. The Defendants. All of the Defendants in this action are part of the same

corporate family, and acted together to control the entire creation, marketing, and sale of the Certificates at issue here, including buying and pooling together mortgage loans, underwriting securities, and selling the securities to Allstate and other investors. From 2004 to 2008, 6

Goldman was a major player in the mortgage market. Its business activities included buying and selling mortgage-related securities on behalf of itself and its clients, and amassing billions of dollars worth of proprietary mortgage-related holdings. In 2006 and 2007 alone, it designed and underwrote 93 RMBS and 27 mortgage-related CDO securitizations, totaling approximately $100 billion. 14. As discussed below, the process of issuing an RMBS securitization involves

several entities, but their efforts are joint. The Goldman sponsor, depositor, and underwriter Defendants all worked together to create, market, and issue the Certificates. Each is prominently identified on the front of the Offering Materials. Thus, they all spoke in those materials, and are jointly responsible for the material misstatements and omissions therein. 15. Defendant Goldman, Sachs & Company is a New York limited partnership with

its principal place of business in New York, New York. Defendant Goldman, Sachs & Company was the sole underwriter for the Certificates. 16. Defendant Goldman Sachs Group, Inc. is a Delaware corporation with its

principal executive office in New York, New York. Goldman Sachs Group, Inc., itself and through its subsidiaries, engaged in mortgage lending and other real estate finance-related businesses, including mortgage lending, securities dealing, and insurance underwriting. It is the corporate parent of all of the Defendants. Defendant Goldman Sachs Group, Inc., is a limited partner in Goldman Sachs Mortgage Company, and controls the general partner of Goldman Sachs Mortgage Company. 17. Defendant Goldman Sachs Mortgage Company is a New York limited partnership

with its principal place of business in New York, New York. Goldman Sachs Mortgage Company is an affiliate of Goldman, Sachs & Company, and was the sponsor for the Certificates.

18.

Defendant GS Mortgage Securities Corporation is a Delaware corporation with its

principal place of business in New York, New York. Defendant GS Mortgage Securities Corporation, which is an affiliate of Goldman, Sachs & Company, served as the depositor for the Securitizations. 19. Relevant Non-Parties. Avelo Mortgage LLC served as servicer for some of the

Mortgage Loans, including those in GSAMP Trust 2006-HE7 and GSAMP Trust 2006-HE5. Avelos role as servicer is established through Pooling and Servicing Agreements (PSAs), which are governed by New York law. It is an affiliate, through common parent ownership, of Goldman Sachs Mortgage Company. 20. At all relevant times, Goldman committed the acts, caused or directed others to

commit the acts, or permitted others to commit the acts alleged in this Complaint. Any allegations about acts of Defendants means that those acts were committed through their officers, directors, employees, agents, and/or representatives while those individuals were acting within the actual or implied scope of their authority. 21. entity. JURISDICTION AND VENUE 22. Pursuant to CPLR 301 and 302, this Court has jurisdiction over Goldman None of the causes of action in this Complaint seek relief from any bankrupt

because Goldman transacts business in New York and because Goldman committed acts in New York causing injury to plaintiffs. 23. Venue is proper in this County pursuant to CPLR 503(a) because each cause of

action arose, in part, in New York County; because Goldman resides within this county and has its principal places of business here; and because a majority of the acts giving rise to the causes of action set forth in this complaint occurred in New York. Specifically: (a) the disclosures 8

were prepared and approved in New York; (b) decisions regarding which loans to securitize were made in and directed from New York; (c) Goldmans underwriting policies and practices were set and implemented in New York; and (d) many of the collateral loans were originated or acquired in New York. Many of the key witnesses and documents also still reside in New York. BACKGROUND A. 24. The Mechanics of Mortgage Securitization Mortgage pass-through securities, or certificates, represent interests in a pool of

mortgage loans; the securities are shares of the pool that are sold to investors. The passthrough securities entitle the holder to principal and interest payments from the pool of mortgages. Although the structure and underlying collateral may vary by offering, the basic principle of pass-through securities remains the same: The cash flow from the pool of mortgages is passed through to the securities holders as payments are made by the underlying mortgage borrowers. 25. The initial step in creating a mortgage pass-through security is the generation of

the loans by the initial originators. Loans are then pooled into groups by a sponsor or seller. The sponsor of a mortgage-backed security (MBS) is often a Wall Street investment bank. Here, the sponsor was Goldman Sachs Mortgage Company. In order to ensure that it had access to sufficient numbers of loans to feed its securitization machine, in many cases Goldman would provide a warehouse line of credit to the loan originator, with the warehouse line providing the funds that were loaned to the ultimate borrower. 26. After pooling the loans, the sponsor transfers them to the depositor. The

depositor is typically a special-purpose affiliate of the sponsor, and exists solely to receive and then pass on the rights to the pools of loans. It is also often controlled directly by the same officers and directors who run the sponsor. The depositor GS Mortgage Securities Corporation 9

is a wholly-owned subsidiary of the sponsor, Goldman Sachs Mortgage Company, and has no business operations other than securitizing mortgage assets and related activities. (see, e.g., GSAMP 2006-HE5 Pro. Supp. at S-59.) 27. Upon acquisition, the depositor transfers, or deposits, the acquired pool of loans

to an issuing trust. The depositor then securitizes the pool of loans in the issuing trust so that the rights to the cash-flows from the pool can be sold to investors. The securitization transactions are structured such that the risk of loss is divided among different levels of investment, or tranches. Tranches consist of multiple series of related securities offered as part of the same offering, each with a different level of risk and reward. Any losses on the underlying loanswhether due to default, delinquency, or otherwiseare generally applied in reverse order of seniority. As such, the most senior tranches of pass-through securities receive the highest credit ratings because they are the least risky. Junior tranches, being less insulated from risk, typically obtain lower credit ratings, but offer greater potential returns. 28. Once the tranches are established, the issuing trust passes the securities or

certificates back to the depositor, who becomes the issuer of the securities. The depositor then passes the securities to one or more underwriters, who offer and sell the securities to investors in exchange for cash that is passed back to the depositor, minus any fees owed to the underwriters. 29. The underwriter (in this case, Goldman) plays a critical role in the securitization

process by purchasing the securities from the issuing trust through the depositor and then selling them to investors. The underwriter provides information about the loans and the securities that potential investors like Allstate use to decide whether to purchase the securities. 30. Because the cash flow from the loans in the collateral pool of a securitization is

the source of payments to holders of the securities issued by the trust, the credit quality of the

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securities depends directly upon the credit quality of the loans in the collateral pool, particularly the likelihood that mortgage holders will make their mortgage payments. The most important information about the credit quality of the loans is contained in the loan files that the mortgage originator develops while making the loans. 31. For residential mortgage loans, each loan file normally contains documents

including the borrowers application for the loan; verification of the borrowers income, assets, and employment; references; credit reports on the borrower; an appraisal of the property that will secure the loan and provide the basis for measures of credit quality, such as LTV ratios; and a statement of the occupancy status of the property. The loan file also typically contains the record of the investigation by the loan originator of the documents and information provided by the borrower, as well as the detailed notes of the underwriter setting forth the rationale for making each loan. Investors like Allstate were not given access to the loan files; rather, they had to rely upon the representations made by Goldman in the Offering Materials. 32. The collateral pool for each securitization usually includes thousands of loans.

Instead of each potential investor reviewing thousands of loan files, Goldman is responsible for gathering, verifying, and presenting to potential investors accurate and complete information about the credit quality and characteristics of the loans that are deposited in the trust. In accordance with industry standards, this involves performing due diligence on the loan pool and the originators to ensure the representations being made to investors are accurate. 33. Investors, like Allstate, rely on the description of the quality and nature of the

loans in the offering materials. 34. The Wall Street Journal has summarized the securitization process as follows:

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B. 35.

Securitization of Mortgage Loans: The Traditional Model Traditionally, mortgage originators financed their mortgage business through

customer deposits, retained ownership of the loans they originated, and the originator received and retained the mortgage payment streams. When an originator held a mortgage through the term of the loan, the originator also bore the risk of loss if the borrower defaulted and the value of the collateral was insufficient to repay the loan. As a result, the originator had a strong economic incentive to verify the borrowers creditworthiness through prudent underwriting, and to obtain an accurate appraisal of the value of the underlying property before making the mortgage loan. 36. Mortgage loan securitization, however, shifted the traditional originate to hold

model to an originate to distribute model, in which originators sell residential mortgages and transfer credit risk to investors through the issuance and sale of RMBS. Under the new model, originators no longer hold the mortgage loans to maturity. Instead, by selling the mortgages to investment banks, which issue securities collateralized by the mortgages to investors, the originators obtain the funds to make more loans. Securitization also enables originators to earn

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most of their income from transaction and loan-servicing fees, rather than from the spread between interest rates paid on deposits and interest rates received on mortgage loans, as in the traditional model. Thus, securitization gives originators an incentive to increase the number of mortgages they issue regardless of credit quality. However, contractual terms, adherence to solid underwriting standards, and good business practices obligate originators to underwrite loans in accordance with their stated policies and to obtain accurate appraisals of the mortgaged properties. 37. Traditionally, most mortgage securitizations were conducted through the major

Government Sponsored Enterprises (the Agencies), i.e., the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae). The Agencies purchased loans from originators and securitized the loans. The Agency securitizations had high credit quality because the Agencies required the underlying loans to be originated in accordance with strict underwriting guidelines. Most non-Agency mortgage securitizations traditionally also had relatively high credit quality because they typically complied with the Agencies underwriting standards. C. 38. The Systemic Violation Of Underwriting And Appraisal Standards In The Mortgage Securitization Industry During the 1980s and 1990s, the mortgage securitization business grew rapidly,

making it possible for mortgage originators to make more loans than would have been possible using only the traditional primary source of funds from deposits. Originators during this early growth period generally made loans in accordance with their stated underwriting and appraisal standards and provided accurate information about the loans, borrowers, and mortgaged

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properties to the Wall Street banks that securitized the loans. In turn, the Wall Street banks provided accurate information about the loans, borrowers, and properties to RMBS investors. 39. Unbeknownst to investors, the game fundamentally changed in the early 2000s.

While both originators and Wall Street banks, through the 1990s, played by the rules and complied with their obligations to underwrite loans responsibly and provide accurate information to RMBS investors, this ceased to be the case in the following decade. The history of the recent market collapse was investigated by the FCIC, which reviewed millions of pages of documents, interviewed more than 700 witnesses, and held 19 days of public hearings in New York, Washington, D.C., and communities across the country, and concluded: [I]t was the collapse of the housing bubblefueled by low interest rates, easy and available credit, scant regulation, and toxic mortgagesthat was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008. Trillions of dollars in risky mortgages had become embedded throughout the financial system, as mortgage-related securities were packaged, repackaged, and sold to investors around the world. (FCIC Report at xi, xvi.) 40. With historically low interest rates decreasing the profits of traditional lending

and securitization through Fannie Mae or Freddie Mac, Wall Street banks looked for new ways to increase fees. Banks began to focus on creating products outside the traditional lending guidelines and expanding the number of borrowers who could purportedly qualify for loans, while also charging those borrowers much higher fees than they would have paid on conforming Fannie Mae or Freddie Mac loan terms. As a result, the number of loans that were riskier than those that could be securitized through Fannie Mae or Freddie Mac skyrocketed. For instance, according to an April 7, 2010 report by the FCIC, loans that did not conform to Fannie Mae and Freddie Mac guidelines grew from around $670 billion in 2004 to over $2 trillion in 2006.

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41.

Such an enormous rise in mortgage volume over a short period of time created

problems with loan funding capital and risk allocation. As the FCIC put it: [U]nder the radar, the lending and financial services industry had mutated. (FCIC Report at 7.) It found that [s]ecuritization and subprime originations grew hand in hand, as [t]he nonprime mortgage securitization process created a pipeline through which risky mortgages were conveyed and sold throughout the financial system. This pipeline was essential to the origination of the burgeoning numbers of high-risk mortgages. (FCIC Report at 70, 125.) 42. In other words, the shift towards non-traditional loans sparked a growing focus on

the originate to distribute model. What has now become clear is that, because the risk of nonpayment was transferred to investors, originators, underwriters, and others in the securitization chain were incentivized to pump out as many loans as possible, the more exotic (and thus the more lucrative), the betteras long as they could be sold. Originators and securitizers were willing to abandon sound underwriting practices because they offloaded the risk onto investors like Allstate, in the process misrepresenting the loan collateral to ensure the securities marketability. As the FCIC concluded: The originate-to-distribute model undermined responsibility and accountability for the long-term viability of the mortgages and mortgagerelated securities and contributed to the poor quality of mortgage loans. (FCIC Report at 125.) 43. The underwriters of the offerings and originators of the underlying mortgage

loans make large amounts of money from the fees and other transaction revenues associated with their efforts to create and sell mortgage-backed securities. These fees and revenues are generally calculated as a percentage of the securitizations principal balance, and can amount to millions of dollars in the context of large transactions. From 2000 through 2008, Wall Street banks had learned that they could earn much more from arranging and selling mortgage-backed securities

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than they could make by simply making loans and selling them. The securitization business was a gold mine for the investment banks that were able to control significant market share. 44. Underwriters of RMBS offerings like those at issue typically would collect

between 0.2% to 1.5% in discounts, concessions, or commissions. On the five offerings at issue here, these commissions would have yielded Goldman millions of dollars in underwriting fees alone. By providing warehouse loans and serving as a sponsor and depositor of the offerings, Goldman earned even more. It was, in part, the fees Goldman was receiving for its promised underwriting, diligence, and oversight that kept Goldman in the business of acquiring mortgage loans from originators for securitization, even after the company became aware that the loans being provided by these originators did not comport with basic underwriting practices. 45. Because the underlying loans were on non-traditional terms, banks could offer

investors higher rates of return on the securitized pools, even as the deals structure (such as, for instance, including extra mortgage loans in the collateral pool) purportedly made the investments safe. Unknown to investors like Allstate, however, the securities were much riskier than disclosed because Goldman misrepresented many aspects of the Mortgage Loans. 46. For instance, Goldman: (1) overstated how many loans were owner-occupied

(owner-occupied properties have lower risks), (2) understated the loan pools average LTV and CLTV ratios (suggesting the borrowers had more of an equity cushion than they did), (3) misrepresented the loans adherence to standard underwriting practices, and (4) failed to inform investors such as Allstate that high numbers of defective loans were waived into the mortgage pools (making representations regarding the quality of the underwriting process even more misleading). Each misrepresentation and omission created an additional, hidden layer of risk

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well beyond that known to be associated with an adjustable rate mortgage or a home equity loan in the abstract. 47. Since the payment streams from borrowers ultimately fund payments to investors,

if enough loans in the pool default, investors will not be paid the interest returns promised and may even lose their principal. The true value of the Certificates is revealed to be lower as the higher risk is discoveredas evidenced by, among other things, a drop in market value as the true risk profile of the underlying mortgage pool is revealed. As such, any representation bearing on the riskiness of the underlying mortgage loans was material to investors, including Allstate. In short, by misrepresenting the true risk profile of the underlying loan pools, Goldman defrauded investors like Allstate. 48. As the FCIC found:

The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to have been significant. (FCIC Report at 187 (emphasis added).) SUBSTANTIVE ALLEGATIONS I. THE OFFERING MATERIALS UNTRUE STATEMENTS OF MATERIAL FACT AND OMISSIONS A. 49. Goldmans Misrepresentations Regarding Underwriting Standards and Practices Consistent with its roles as sponsor and underwriter of the Certificates, Goldman

represented to investors in the Offering Materials that the Mortgage Loans were originated or acquired in accordance with stated underwriting guidelines. For example, according to the Prospectus Supplement for GSAMP 2006-HE7, Goldman stated that [t]he mortgage loans were

17

originated or acquired generally in accordance with the underwriting guidelines of the original loan sellers, or in the sponsors underwriting guidelines in the case of the conduit mortgage loans. (GSAMP 2006-HE7 Pro. Supp. at S-36.) Similar representations are made in each of the other Certificates Prospectus Supplements. 50. Goldman reassured investors that the originators from which it had acquired loans

(either through bulk purchases or through its conduit program) had, in fact, adhered to their own underwriting standards. This representation was important, because it reflected Goldmans own verification of the loan-origination practices, which investors like Allstate were not in a position to assess. For example, the Prospectus for GSAMP 2006-HE7 (and other Offering Materials which contained similar representations) reassured investors that: The lender or an agent acting on the lenders behalf applies the underwriting standards to evaluate the borrowers credit standing and repayment ability, and to evaluate the value and adequacy of the mortgaged property as collateral. GSAMP 2006-HE7 Prospectus dated October 6, 2006, at 29. In general, the lender may require that a prospective borrower fill out a detailed application designed to provide to the underwriting officer pertinent credit information. As a part of the description of the borrowers financial condition, the lender may require the borrower to provide a current list of assets and liabilities and a statement of income and expense as well as an authorization to apply for a credit report, which summarizes the borrowers credit history with local merchants and lenders and any record of bankruptcy. The lender may obtain employment verification from an independent source (typically the borrowers employer). The employment verification reports the length of employment with that organization, the current salary and whether it is expected that the borrower will continue such employment in the future. If a prospective borrower is self employed, the lender may require the borrower to submit copies of signed tax returns. The lender may require the borrower to authorize verification of deposits at financial institutions where the borrower has demand or savings accounts. In determining the adequacy of the mortgaged property as collateral, the lender will generally obtain an appraisal to determine the fair market value of each property considered for financing. Id.

18

[T]he lender makes a determination as to whether the prospective borrower has sufficient monthly income available as to meet the borrowers monthly obligations on the proposed mortgage loan and other expenses related to the mortgaged property such as property taxes and hazard insurance. Id.

51.

The Offering Materials also made specific representations about the underwriting

criteria of certain third-party originators from whom Goldman purchased the Mortgage Loans. For example, for the GSAMP 2006-HE7 securitization, Goldman acquired approximately 30.87% of the loans from SouthStar Funding, LLC. To reassure Allstate and other investors that the loans had been made in accordance with reasonable underwriting criteria, Goldman represented, among other things, that SouthStars guidelines are intended to evaluate the borrowers ability to repay the mortgage loan, evaluate the borrowers credit and evaluate the value and adequacy of the collateral. SouthStar does not approve mortgage loans based solely on the value of the collateral. (Id. at S-45.) Moreover, the borrowers must show the ability to repay the mortgage loan, have acceptable credit, and acceptable collateral. 52. The Offering Materials further: (1) described the criteria for acceptable collateral;

(2) described Risk Categories, the borrower eligibility criteria, including maximum debt to income ratio, minimum FICO score, and valid credit score, which must be met; and (3) described the appraisal procedures which [c]omply with rules of regulators set forth by state and federal agencies. (Id. at S-47.) The Offering Materials reassured investors that [t]he mortgage loans originated or acquired by SouthStar were generally in accordance with the underwriting criteria described in this section. (Id. at 45.) Goldman put its own stamp of approval on the loans, telling investors that Goldman believed that originators like SouthStar applied the described underwriting guidelines. (Id. at S-45; see also Prospectus Supplement for GSAMP Trust 2006-S3 at S-33 (describing Fremonts underwriting guidelines which Goldman believed . . . to have been applied).) 19

53.

The Offering Materials for GSAMP 2006-HE7 and GSAMP 2006-HE5 made

similar representations regarding Aames underwriting criteria. They represented, among other things, that: (a) Aames Fundings underwriting policy was to analyze the overall situation of the borrower and to take into account compensating factors that may be used to offer certain areas of weakness; (b) [a] critical function of Aames Fundings underwriting process was to identify the level of credit risk associated with each applicant for a mortgage loan; and (c) Aames Funding was required to approve all loan applications in accordance with its underwriting criteria. (Id. at S-48S-49.) 54. With respect to the loans Goldman acquired through the GS Conduit Program.

Goldman represented in the Offering Materials, including the materials for GSAMP 2006-HE7, that it purchase[] mortgage loans originated by the original loan sellers if the mortgage loans generally satisfy the sponsors underwriting guidelines. (Id. at S-7.) The underwriting criteria for the GS Conduit Program are described in each of the Prospectuses for the Certificates, and include a detailed discussion of Goldmans underwriting guidelines, borrower credit applications, documentation guidelines, debt-to-income and loan-to-value thresholds, and appraisal standards. (See, e.g., id. at 29-33.) 55. For example, Goldman represented that All of the mortgage loans that GSMC may acquire through its conduit program will be acquired generally in accordance with the underwriting criteria described in this section. In certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant GSMC to make certain exceptions to these guidelines. In such instances GSMC would purchase a mortgage loan that did not completely conform to the guidelines set out below. (Id. at 30.) [E]ach borrower applying for a mortgage loan must complete a credit application. The credit application is designed to provide the originating lender with relevant credit information about the prospective borrower

20

such as information with respect to the borrowers assets, liabilities, income . . . credit history, employment history and personal information. Based on the data referred to above . . . the originating lender makes a determination about whether the borrowers monthly income (if required to be stated) will be sufficient to enable the borrower to meet its monthly obligations on the mortgage loans and other expenses related to the property. An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the mortgaged loan. All appraisals must . . . conform to the Uniform Standards of Professional Appraisal Practice.

56.

The underwriting process used to originate the pools of Mortgage Loans

underlying Allstates Certificates was very important to Allstate and other investors because, as discussed above, the quality of loans in the pool determines the risk of the certificates backed by those loans. If a reasonable underwriting process was not followed, the chances that the loans had riskier features than Goldman claimed would greatly increase, making the entire loan pool much riskier and thus more prone to default and market losses. A systemic underwriting failure would decrease the reliability of all the information investors have about the loans, and thus would significantly increase the perceived and actual risk to investors, thus resulting in a lower true value of the Certificates. 57. As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. Goldmans representations regarding its and its originators underwriting practices were false and misleading. The Mortgage Loans underlying Allstates Certificates did not comply with the underwriting standards the Offering Materials described because those standards were systemically ignored by Goldman and by its originators. They disregarded borrowers actual repayment ability and the value and adequacy of mortgaged property that was used as collateral. That the loans were systematically generated without regard to the stated 21

underwriting guidelines is confirmed by Allstates loan-level analysis of the Mortgage Loans at issue here, statistics regarding Goldmans waiver of guidelines, the collateral pools dismal performance, internal e-mails and documents reflecting Goldmans own discovery of borrower misrepresentations and underwriting defects, recent revelations regarding the practices of the originators at issue here, and other facts set forth more fully below. B. 58. Goldmans Misrepresentations Regarding Due Diligence Results Goldmans representations regarding the underwriting process were understood

by investors, including Allstate, to mean that Goldman had taken appropriate measures to ensure that non-compliant loans would not be included in the mortgage pools. 59. Goldman, however, did not disclose that: (1) Goldman in many instances failed

to perform adequate due diligence prior to securitization; (2) when Goldman was informed from its quality review processes that a substantial percentage of loans in the collateral pools were defective, it nonetheless waived the defects as to a substantial percentage of these loans; (3) Goldman instead used its analysis of the loans to negotiate a lower price for the loan pools, or even an outright cash payment, while retaining the defective loans for inclusion in the loan pools; and (4) Goldman improperly failed to adjust its due diligence procedures (such as by increasing its sampling size or refusing to continue to work with problem originators) when its due diligence identified a high number of non-conforming loans. 60. That Goldman was not performing its represented due diligence responsibilities,

and instead was knowingly including loans flagged as being defective, has been confirmed by the recent release of documents from Goldmans third-party due diligence firm, Clayton Holdings, internal e-mails and documents, and other facts set forth below.

22

61.

Goldmans failure to disclose that high numbers of loans had been identified by

the due diligence process, and yet waived into the collateral pools anyway was a fraudulent omission, and rendered its underwriting disclosures false and misleading. C. 62. Owner-Occupancy Statistics The Offering Materials also made represented that a high number of loans were

issued on owner-occupied properties, as compared to investment properties or second homes. 63. Owner-occupancy statistics were material to Allstate because high owner-

occupancy rates should have made the Certificates safer investments than certificates backed by second homes or investment properties. Homeowners who reside in mortgaged properties are less likely to default than owners who purchase homes as investments or vacation homes. This is because such owners are likely to have made investments in improving the property; purchased furnishings for their homes; have children enrolled in the local school system; and are otherwise incentivized to fulfill their mortgage terms rather than default. If a property is foreclosed upon, losing possession of an owner-occupied property means losing the roof over your head, whereas foreclosure on an investment property or second home simply means losing an investment. 64. The Offering Materials contained detailed statistics regarding the Mortgage Loans

in the collateral pool, including the reported owner-occupancy characteristics of the Mortgage Loans. For example, the Offering Materials for GSAMP Trust 2006-HE5 claimed that among the 6,692 loans in the collateral pool, 93% were purportedly for owner-occupied properties; the Offering Materials for GSAMP Trust 2006-HE7 claimed that among the 4,899 loans in the collateral pool, 92% were purportedly for owner-occupied properties; and the Offering Materials for GSAMP Trust 2006-S4 claimed that among the 11,624 loans in the collateral pool, 88% were purportedly for owner-occupied properties.

23

65.

As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. These representations were false and misleading. In truth, a much lower percentage of the loans were owner-occupied. Occupancy was being misrepresented first by the originator to get the borrower approved for the loan, then by Goldman to investors to get the loan sold as securities. This is confirmed by a loan-level analysis of the specific Mortgage Loans at issue here, and other facts set forth below. D. 66. Goldmans Misrepresentations Regarding Loan-to-Value and Combined Loan-to-Value Ratios As discussed above, the LTV ratio is the ratio of a Mortgage Loans original

principal balance to the appraised value of the mortgaged property. The related CLTV ratio takes into account other liens on the property. These ratios were material to Allstate and other investors because higher ratios are correlated with a higher risk of default. A borrower with a small equity position in a property has less to lose if he or she defaults on the loan. There is also a greater likelihood that a foreclosure will result in a loss for the lender if the borrower fully leveraged the property. LTV and CLTV ratios are common metrics for analysts and investors to evaluate the price and risk of mortgage-backed securities. 67. The Offering Materials contained detailed statistics regarding these ratios for the

Mortgage Loans in the collateral pool. For example, the Offering Materials for GSAMP Trust 2006-HE7 represented that only 11.45% of the Mortgage Loans had original LTV ratios in excess of 90%. It also represented that no loan in this Trust had an LTV ratio above 100%. 68. As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. These representations were false and misleading. The underlying data was being manipulated in order to get loans approved, making the LTV and CLTV ratios baseless. Goldman knew that the appraisal process was being actively manipulated, so the originators

24

could keep churning out loans to borrowers that could not afford them, and thus knew that the reported appraisal values did not, in fact, reasonably reflect the value of the mortgaged properties. Goldman thus knew that the LTV ratios reported in the Offering Materials were not reliable indicators of the quality of the loans. The CLTV ratios also sometimes omitted the effect of additional liens on the underlying properties, rendering them even less accurate. That the LTV and CLTV statistics were false and misleading is confirmed by a loan-level analysis of the specific Mortgage Loans at issue here, by testimony showing widespread appraisal fraud, and other facts set forth below. E. 69. Goldmans Misrepresentations Regarding The Sufficiency of Borrower Income Information regarding a borrowers income, such as the ratio of a borrowers debt

to his or her income, was material to Allstate because it represents a borrowers ability to afford the mortgage payments at issue, and thus directly implicates the likelihood of default. 70. In the Offering Documents for GSAMP Trust 2006-HE5 and GSAMP Trust

2006-HE7, Goldman represented that borrowers were required to furnish a current list of assets and liabilities and a statement of income and expense as well as an authorization to apply for a credit report, which summarizes the borrowers credit history with local merchants and lenders and any record of bankruptcy. Similar representations were also made for specific originators. For example, the Offering Materials for GSAMP Trust 2006-S4 represented as to IndyMac that its underwriting criteria includes an analysis of the borrowers credit history, ability to repay the mortgage loan and the adequacy of the mortgaged property as collateral. (GSAMP 2006-S4 Pro. Supp at. S-35.) 71. Similarly, regarding loans obtained through the GS Conduit Program, in GSAMP

Trust 2006-HE5 and GSAMP Trust 2006-HE7, Goldman represented that its underwriting

25

included an analysis of whether the borrowers monthly income (if required to be stated) will be sufficient to enable the borrower to meet its monthly obligations on the mortgage loan and other expenses related to the property, including property taxes, utility costs, standard hazard insurance and other fixed and revolving obligations other than housing expenses. (See, e.g., GSAMP 2006-HE7 Pro. Supp. at 30.) 72. As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. These representations were false and misleading. The abandonment of sound underwriting practices facilitated the widespread falsification of these statistics within the Offering Materials. This abandonment is evidenced by recent revelations regarding the practices of the originators at issue here, the alarmingly high rate of delinquency and default in the mortgage pools, and Allstates statistical analysis of the loans at issue here. In reality, the borrowers claimed income was regularly inflated, such that the borrowers true ability to repay the loan was much worse than represented. F. 73. Goldmans Misrepresentations Regarding Credit Ratings Each tranche of the Allstate Certificates received a credit rating indicating the

rating agencies view of its risk profile. The ratings were material to reasonable investors, including Allstate, because the ratings provided additional assurances that investors would receive the expected interest and principal payments. The Certificates would have been unmarketable to investors like Allstate and would not have been issued but for the provision of these ratings, as almost every prospectus stated that, [i]n order to be issued, the Offered Certificate must be assigned certain, specified ratings from the rating agencies. (See, e.g., GSAMP 2006-HE5 Pro. Supp. at S-136.) 74. The initial ratings given to the Certificates were AAA or AA, the two highest

ratings available. According to S&Ps Web site: An obligation rated AAA has the highest 26

rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is extremely strong. And an obligation rated AA by S&P has a very strong capacity to meet financial commitments. 75. The Offering Materials represented that the ratings came from analysis done by

the rating agencies to assess the likelihood of delinquencies and defaults in the underlying mortgage pools. For example, the Offering Materials for GSAMP Trust 2006-HE5 represented: A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled by the Final Scheduled Distribution Date. The rating takes into consideration the characteristics of the mortgage loans and the structural, legal and tax aspects associated with the certificates. Id. at S-136; see also GSAMP 2006-HE5 Pro. Supp. at 127 (It is a condition to the issuance of the securities of each series offered by this prospectus and by the related prospectus supplement that the nationally recognized statistical rating agency or agencies specified in the prospectus supplement shall have rated the securities in one of the four highest rating categories. Ratings on mortgage-backed securities address the likelihood of receipt by securityholders of all distributions on the underlying mortgage loans or other assets. These ratings address the structural, legal and issuer-related aspects associated with such securities, the nature of the underlying mortgage loans or other assets and the credit quality of the guarantor, if any.) The Offering Materials for each of the Certificates made materially identical representations. See also Exhibits C-G. 76. These representations were false and misleading. The rating agencies were fed

baseless and false statistics regarding the loans (including the same statistics and misrepresentations discussed herein), as evidenced by a statistical analysis of the Mortgage Loans at issue here. This made representations regarding the ratings process false (as a rigged

27

process does not address the likelihood of receipt by Allstate) and rendered the ratings themselves similarly false and misleading, as they only represented the credit agencies analysis of a non-existent mortgage pool that had no relation to that truly underlying Allstates Certificates. G. 77. Goldmans Misrepresentations Regarding Credit Enhancement Credit enhancement represents the amount of cushion or protection from loss

exhibited by a given security. This cushion is intended to improve the likelihood that holders of highly rated certificates receive the interest and principal they expect based on the Offering Documents. The level of credit enhancement offered is based on the makeup of the loans in the underlying collateral pool. Riskier pools necessarily need higher levels of credit enhancement to ensure payment to senior certificate holders. Credit enhancements for a given trust also impact the overall credit rating that a given tranche of certificates receives. The level of credit enhancement for the Certificates was material to Allstate because it represented the protection purportedly afforded from loss. 78. The Offering Materials for each of the offerings described the credit

enhancements applicable to the certificates. For example, the Offering Materials for GSAMP Trust 2006-HE7 represented that such enhancements included overcollateralization, excess interest . . . to cover losses on the mortgage loans and as a distribution of principal to restore overcollateralization to a specified level as a result of losses, and subordination. 79. Excess interest and overcollateralization generally refer to the purported

effects of including in the collateral pool more mortgage loans than would be strictly necessary to pay off all investors, assuming that every mortgage made every payment on time. Subordination refers to the fact that, should loans become delinquent or default, not all investors are treated equally; instead, investors are paid out of what funds are available despite 28

those losses first. Any leftover funds from what was actually received then flow through the payment waterfall to the next class of investors, and so on. 80. As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. These representations were false and misleading. All of the purported enhancements depended on or derived from false representations regarding the quality of the Mortgage Loans underlying the Certificates. Highly risky, misrepresented loans piled on top of other highly risky, misrepresented loans do not provide a true enhancement. H. 81. Goldmans Misrepresentations Regarding Underwriting Exceptions Whether Goldman and/or the originators were making case-by-case (rather than

bulk) exceptions to the otherwise-applicable underwriting guidelines was material to Allstate and other investors. A disclosed guideline is factually irrelevantand indeed misleadingfrom a risk-analysis perspective if large numbers of loans were peremptorily excused from those standards. 82. Goldman represented that it and the originators made only case-by-case

exceptions to the disclosed underwriting standards, based on compensating factors that balanced out the risks of a loan application and thereby improved the quality of a loan application. For example, the Offering Materials for GSAMP Trust 2006-HE5 and GSAMP Trust 2006-HE7 represented that, for the Conduit Program, [i]n certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant [Goldman Sachs Mortgage Company] to make certain exceptions to these [underwriting] guidelines. (See, e.g., GSAMP 2006-HE5 Pro. Supp. at 30.) 83. As set forth in Exhibits C-G, similar representations were made in all of the

Offering Materials. These representations were false and misleading. Loans were routinely granted outside of the stated guidelines, without regard to whether there were any purported 29

countervailing features justifying a lending or underwriting exception. This is evidenced by, among other things, the high percentage of Goldman loans identified by the third-party due diligence firm Clayton Holdings that both failed the given underwriting guidelines and that did not show any countervailing features, and the numerous facts showing underwriting abandonment by many of the key originators at issue here. II. EVIDENCE THAT ALL OF GOLDMANS REPRESENTATIONS WERE UNTRUE AND MISLEADING A. 84. Evidence of the Securities High Default Rates and Plummeting Credit Ratings The drastic rise in default rates on the Mortgage Loans underlying Allstates

Certificates is itself evidence that the underwriting practices Goldman represented were followed were, in fact, violated. The Certificates were supposed to be long-term, stable investments. Yet, as seen in the following chart, they have already experienced payment problems at an astronomical rate, well beyond what should have occurred for loan pools that had been properly underwritten and contained loans that actually had the characteristics Goldmans Offering Materials claimed. Percentage of original loans already written off 29.76% 33.13% 45.52% 54.26% 21.30% Percentage of current loans 30, 60, or 90+ days delinquent 48.38% 46.08% 19.11% 19.74% 28.69%

Securitization GSAMP Trust 2006-HE7 GSAMP Trust 2006-HE5 GSAMP Trust 2006-S4 GSAMP Trust 2006-S3 GSAA Trust 2006-13

Shockingly, overall, approximately 36.79% of the Mortgage Loans underlying the Certificates that Allstate invested in have already had to be written off, and approximately 32.40% of the remaining loans are currently 30, 60, or 90 or more days delinquentall within a few years of when the loans were made.

30

85.

Relatedly, the ratings given to the Certificates have significantly deteriorated.

Allstates investments were all initially investment grade, receiving AAA or AA ratings. Because of the systemic abandonment of underwriting standards and the resulting inclusion of highly risky or outright fraudulent Mortgage Loans in the collateral pools backing the Certificates, as seen in the following table, the majority of Allstates Certificates have been downgraded to junk-bond ratings. All of the most serious downgrades (i.e., to non-investment grade) did not take place until mid-2008 or later. Certificate GSAMP Trust 2006-HE7, M2 GSAMP Trust 2006-HE5, M2 GSAMP Trust 2006-S4, A1 GSAMP Trust 2006-S3, A1 GSAA Trust 2006-13, AF2 86. Initial Rating AA/Aa2 AA/Aa2 AAA/Aaa AAA/Aaa AAA/Aaa Current Rating C/CC CCC/C CCC/C D/C CCC/Caa3

These downgrades underscore the fact that the investment-grade ratings reported

in the Offering Materials were unjustifiably high and misstated the true credit risk of the RMBS purchased by Allstate. 87. Defaults are usually caused by a large and unexpected disruption to a borrowers

income. In a properly underwritten pool of loans, there should not be a large spike of defaults occurring shortly after origination, because it is unlikely that many borrowers would all incur a sudden and unexpected change to their payment ability so soon after purchasing a home. However, when borrowers are put into loan products they cannot actually afford, they quickly and predictably fall behind on their payments. As such, high, early rates of default and delinquencysuch as the high rates hereare cogent evidence that the loans were not properly underwritten.

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88.

The defaults and related drop in value thus are due to Goldmans wrongdoing, and

not because of the general change in economic conditions. Economic studies confirm this common-sense conclusion. For instance, the F.B.I. investigated three million residential mortgages, and found that between 30% and 70% of early payment defaults were linked to significant misrepresentations in the original loan applications. Loans containing egregious misrepresentations were five times more likely to default in the first six months than loans that did not. 89. The defaults and related drop in value thus are due to Goldmans wrongdoing, and

not because of the general change in economic conditions. Investment banks were the driving force behind the structured finance products that provided a steady stream of funding for lenders originating high risk, poor quality loans and that magnified risk throughout the U.S. financial system. The investment banks that engineered, sold, traded, and profited from mortgage related structured finance products were a major cause of the financial crisis. (SPSI Report at 11 (emphasis added).) B. 90. Loan-Level Evidence That The Mortgaged Properties Were Not OwnerOccupied Using techniques that only recently became available to investors, Allstate tested

Goldmans representations on a loan-level basis for thousands of loans across all of the Securitizations. 91. For each offering, Allstate analyzed between 1,444 and 1,600 randomly-selected

loans from within the collateral pool. This sample size is more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loans characteristics. Analyzing data for each Mortgage Loan in each Offering would have been unnecessary for purposes of Allstates pleading. Statistical sampling is an accepted method

32

of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private businesses. As the size of a sample increases, the reliability of its estimations of the total populations characteristics increases as well. Experts in residential mortgage-backed securities cases have found that a sample size of just 400 loans can provide statistically significant data. 92. To determine whether a given borrower actually occupied the property as

claimed, Allstates analysis looked at various factors, including an investigation of tax information for the sampled loans. One would expect that a borrower residing at a property would have the tax bills sent to that address, and would take all applicable tax exemptions available to residents of that property. If a borrower had his or her tax records sent to another address, that is good evidence that that borrower did not actually reside at the mortgaged property. If a borrower declined to make certain tax exemption elections that depend on the borrower living at the property, that also is strong evidence the borrower was living elsewhere. 93. A review of credit records was also conducted. One would expect that people

have bills sent to their primary address. If a borrower was telling creditors to send bills to another address, even six months after buying the property, that is good evidence the borrower was living elsewhere. 94. A review of property records was also conducted. It is less likely that a borrower

lives in any one property if in fact that borrower owns multiple properties. It is even less likely the borrower resides at the mortgaged property if a concurrently owned separate property did not have its own tax bills sent to the supposedly owner-occupied property included in Goldmans mortgage pool.

33

95.

A review of other lien records was also conducted. If the property was subject to

additional liens but those materials were sent elsewhere, that is good evidence the borrower was not living at the mortgaged property. If the other lien involved a conflicting declaration of residency, that too would be good evidence that the borrower did not live in the subject property. 96. Though the ability to gather such information for large numbers of loans and run

these tests was only recently made available to investors like Allstate, these tests draw from data contemporaneous with the transactions at issue. They thus are evidence that a then-existing factowner occupancywas misrepresented. 97. The results of Allstates loan-level analysis of true owner-occupancy rates on the

Mortgage Loans underlying its Certificates are set forth below and are further detailed in the Exhibits. Failing multiple of the tests described above is strong evidence that the borrowers did not in fact reside at the mortgaged properties. The results thus show that, despite Goldmans representations, a much higher percentage of borrowers did not occupy the mortgaged properties: Percentage of Owner-Occupied Properties in Prospectus 91.9% 92.2% 88.0% 94.0% 77.8% Actual Percentage of OwnerOccupied Properties 82.2% 82.1% 75.3% 81.6% 69.5%

Asset GSAMP 2006-HE7 GSAMP 2006-HE5 GSAMP 2006-S4 GSAMP 2006-S3 GSAA 2006-13 98.

Prospectus Overstatement 9.7% 10.1% 12.7% 12.4% 8.3%

The consistency of these misrepresentations across the offerings confirms that the

underwriting problems within the Mortgage Loans and the Certificates were systemic. As such, Allstates loan-level analysis not only shows that the specific owner-occupancy statistics were false and misleading, but also supports the conclusion that the Offering Materials

34

representations regarding the originators adherence to the given underwriting guidelines were also false and misleading. 99. Further, the consistency of the results shows that these were not simply borrowers

that changed their mind. Rather, Goldman and the originators knew that borrowers were misrepresenting their intent to live at the property, because Goldman, the originators, and the borrowers all knew it would help shuffle the loan through the approval and securitization process. C. 100. Evidence That The LTV And CLTV Ratios Were Materially Misrepresented Using techniques and methodologies that only recently became available to

investors, Allstate had the underlying property valued, at the time of origination, using data contemporaneous with the original valuation that Goldman would have done, by an industrystandard automated valuation model (AVM). AVMs are routinely used in the industry as a way of valuing properties during prequalification, origination, portfolio review, and servicing. AVMs have become so ubiquitous that their testing and use is specifically outlined in regulatory guidance, and is discussed in the 2010 Dodd-Frank Act. 101. AVMs rely upon data similar to what appraisers useprimarily county assessor

records, tax rolls, and data on comparable properties. AVMs produce independent, statisticallyderived valuation estimates by applying modeling techniques to these data. The AVM that Allstate used incorporates a database of 500 million mortgage transactions covering zip codes that represent more than 97% of the homes in the United States, occupied by more than 99% of the population. Independent testing services have determined that this AVM is the most accurate of all such models. 102. The results of this analysis for each Certificate are set forth in the Exhibits.

Applying the AVM to the available data for the loans underlying the Certificates shows that the 35

value used by Goldman in the represented LTVs were materially and consistently inflated. This caused the disclosed LTV and CLTV ratios to be lower than they really were. In other words, the owners were represented to have more of an equity cushion than they really did, and the prospects for recovery of any funds upon a foreclosure were represented to be much higher than they really were. 103. As with owner-occupancy, though the availability to gather such information and

run these tests was only recently made available to investors like Allstate, these tests draw from data contemporaneous with the transactions at issue. They thus are evidence that the LTV and CLTV ratios were misrepresented at the time the representations were made. 104. For sampled loans that had sufficient information to test, the LTV ratio for

14.42% had true LTV ratios more than 10% higher than what Goldman purportedly calculated. Almost 4% were understated by more than 25%. The CLTV ratios were similarly understated. Over 28% were understated by 10% or more, while over 9% were understated by 25% or more. These overvaluations affected numerous statistics in the Offering Materials. 105. The Offering Materials for GSAMP 2006-HE7, GSAMP 2006-HE5, and GSAA

2006-13 made representations about the percent of loans that had LTV ratios higher than 90%. LTV ratios in excess of 90% provide the lender little value cushion to protect against borrower default and loss upon foreclosure. Consequently, an accurate disclosure of the number is important to investors assessing the riskiness of the security. However, the AVM indicates that a vastly higher percentage of the loans had LTV ratios higher than 90%:

36

Asset GSAMP 2006HE7 GSAMP 2006HE5 GSAA 2006-13 106.

Percentage of Loans Represented to Have LTV Ratios Greater than 90% 11.45% 9.34% 4.27%

Actual Percentage of Loans With LTV Ratios Greater than 90% 44.68% 38.89% 25.13%

Prospectus Understatement of Percent of Loans With High LTV Ratios 33.23% 29.55% 33.23%

The Offering Materials from GSAMP 2006-HE5 and HE7 also made

representations about how many of the Mortgage Loans had LTV ratios greater than 100%, meaning the size of the loan is greater than the value of the property. (This is known as being underwater, where a borrower owes more on the property than it is worth.) Loans with LTV ratios over 100% not only provide the lender no equity cushion, but in fact leave the lender with inadequate collateral from the outset of the loan. Allstates analysis has found that, despite Goldmans representations, an enormous number of the Mortgage Loans had LTV ratios greater than 100%: Percentage of Loans Represented to Have LTV Ratios Greater than 100% 0% 0% 0%

Asset GSAMP 2006-HE7 GSAMP 2006-HE5 GSAA 2006-13 107.

Actual Percentage of Loans With LTV Ratios Greater than 100% 24.64% 20.60% 7.62%

Allstate also analyzed the weighted-average LTV ratio of each collateral pool.

This statistic, too, was misrepresented:

37

Asset GSAMP 2006-HE7 GSAMP 2006-HE5 GSAA 2006-13 108.

Represented Weighted Average LTV 76.97% 80.51% 74.02%

Actual Weighted Average LTV 89.07% 88.34% 82.00%

Prospectus Understatement of Weighted Average LTV 12.10% 7.83% 7.98%

The Offering Materials also contained CLTV ratios of the underlying loans. A

CLTV ratio should take into account the total value of the liens on the property, and thus is more commonly used when the underlying Mortgage Loans are secured by second lien mortgages. The AVM again found that the Offering Materials statistics were false and misleading. For example, the true number of loans with CLTVs in excess of 90% in GSAMP 2006-HE7 and GSAMP 2006-HE5 was grossly understated: Percentage of Loans Represented to Have CLTVs Greater than 90% 20.94% 9.34% 72.66% 39.61% Actual Percentage of Loans With CLTVs Greater than 90% 65.54% 71.86% 80.95% 58.46% Prospectus Understatement of Percent of Loans With High CLTVs 44.6% 49.86% 8.29% 18.85%

Asset GSAMP 2006HE7 GSAMP 2006HE5 GSAMP 2006-S4 GSAA 2006-13 109.

The Offering Materials for GSAMP 2006-S4 and GSAA 2006-13 made

representations about the percent of loans that had CLTVs higher than 100%. Just as with LTVs, CLTVs in excess of 100% provide the lender no cushion to protect against borrower default and loss upon foreclosure. Using both the AVM to recalculate the value of the property and researching the existence of additional, hidden liens revealed that a much higher percentage of the loans had CLTVs higher than 100%:

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Asset GSAMP 2006-S4 GSAA 2006-13 110.

Percentage of Loans Represented to Have CLTVs Greater than 100% 0% 0%

Actual Percentage of Loans With CLTVs Greater than 100% 58.41% 43.18%

Allstate also analyzed the weighted average CLTV of the Mortgage Loans in each

pool and has found that the weighted average CLTV in most of the deals was overstated: Prospectus Understatement of Weighted Average CLTV 16.58% 17.69% 12.18% 13.26% 12.37%

Asset GSAMP 2006-HE7 GSAMP 2006-HE5 GSAMP 2006-S4 GSAMP 2006-S3 GSAA 2006-13 111.

Represented Weighted Average CLTV 79.43% 82.05% 95.45% 99.29% 81.63%

Actual Weighted Average CLTV 96.01% 99.74% 107.63% 112.55% 94.00%

The consistency of these misrepresentations confirms that the underwriting

problems among the Mortgage Loans underlying the Certificates were systemic. As such, Allstates loan-level analysis not only shows that the specific LTV and CLTV statistics were false and misleading, but also supports the conclusion that the Offering Materials representations regarding the originators adherence to the given underwriting guidelines was also false and misleading. Further, the consistency and size of the misrepresentations confirms that Goldman knew the appraisals being used were not reasonable indicators of the properties value, but rather were inflated plug figures generated simply to move the loan through the approval and securitization process.

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D. 112.

Evidence That Goldmans Due Diligence Identified Loans That Did Not Meet The Stated Underwriting Guidelines In connection with its purchase of the Mortgage Loans from the loan originators,

and consistent with industry practice, Goldman performed due diligence to determine the quality of the loans it was purchasing. 113. Specifically, Goldman relied on its own teams of underwriters and well as on

third party due diligence firms (such as Clayton Holdings or The Bohan Group) which were tasked with reviewing whether the loans met Goldmans own standards. Goldman conducted due diligence to determine whether the mortgage loans complied with Goldman-created or approved underwriting guidelines. To make this determination, Goldman employed underwriters who reviewed a sample of the purchased loans to confirm that they both conformed to the representations made by the originators and complied with the companys own credit policies. 114. One of the primary reviewers Goldman used was Clayton. As the FCIC found:

Because of the volume of loans examined by Clayton during the housing boom, the firm had a unique inside view of the underwriting standards that originators were actually applying and that securitizers were willing to accept. (FCIC Report at 166.) 115. For each loan pool it was hired to review, Clayton checked for: (1) adherence to

seller-credit underwriting guidelines and client-risk tolerances; (2) compliance with federal, state and local regulatory laws; and (3) the integrity of electronic loan data provided by the seller to the prospective buyer. This review was commonly referred to as a credit and compliance review. 116. Contract underwriters reviewed the loan files, compared tape data with hard copy

or scanned file data to verify loan information, identified discrepancies in key data points, and graded loans based on seller guidelines and client tolerances. This included answering such

40

questions as whether the loans meet the underwriting guidelines, whether they comply with federal and state laws, notably predatory-lending laws and truth-in-lending requirements, and whether the reported property values [were] accurate. (Id. at 166.) It also critically analyzed whether, to the extent a loan was deficient, there were any compensating factors. (Id.) 117. Clayton generated regular reports for Goldman and the loan seller that

summarized Claytons review findings, including summaries of the loan files that were outside the relevant underwriting standards. Once Clayton identified such problems, the seller had the option to attempt to cure them by providing missing documentation or otherwise explaining to Clayton why a loan complied with the underwriting standards. If additional information was provided, Clayton re-graded the loan. Once this process was complete, Clayton provided the underwriters and sponsors with final reports. 118. Clayton gave loans one of three gradesGrade 3 loans failed to meet guidelines

and were not approved, while Grade 1 loans met guidelines. Tellingly, only 54 percent of the nearly one-million loans reviewed by Clayton Holdings met guidelines, a number that its former president admitted indicated there [was] a quality control issue in the factory for mortgage-backed securities. (Id. at 165-66.) 119. Recently released internal Clayton documents show that, contrary to Goldmans

representations, a startlingly high percentage of loans reviewed by Clayton for Goldman were defective, but were nonetheless included by Goldman in loan pools sold to Allstate and other investors. According to an internal Clayton Holdings Trending Report made public by the government in conjunction with testimony given in September 2010, Goldman Sachs was informed that 23% of the loans Clayton reviewed for Goldman failed to meet guidelines and

41

lacked any compensating features. Yet, Goldman waived in to its pools 29% of those toxic loans that Clayton had identified as being outside the guidelines. 120. This high rejection and waiver ratefrom the same time the Securitizations at

issue here were being assembled and soldfurther confirms that the Mortgage Loans at issue here did not in fact meet the stated underwriting guidelines, and were not subject to any purported compensating factors. Further, the hidden waiver of rejected loans that were not subject to any compensating factors was a fraudulent omission and rendered Goldmans disclosures regarding its underwriting and due diligence processes even more misleading. 121. As the FCIC report concluded:

[M]any prospectuses indicated that the loans in the pool either met guidelines outright or had compensating factors, even though Claytons records show that only a portion of the loans were sampled, and that of those that were sampled, a substantial percentage of Grade 3 Event loans were waived in. .... [O]ne could reasonably expect [the untested loans] to have many of the same deficiencies, and at the same rate, as the sampled loans. Prospectuses for the ultimate investors in the mortgage-backed securities did not contain this information, or information on how few of the loans were reviewed, raising the question of whether the disclosures were materially misleading, in violation of the securities laws. (Id. at 167, 170 (emphasis added).) E. 122. Evidence That The Ratings Were Meaningless Goldman fed the same misrepresentations found in the Offering Materials to the

ratings agencies in an attempt to manufacture predetermined ratings. This not only rendered false Goldmans representations about how the ratings process really functioned, but also assured that the ratings themselves failed to reflect the actual risk underlying the Certificates. 123. Because ratings were based primarily on information provided by Goldman, it

was critical that the information be true and accurate. The SPSI Report noted:

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For RMBS, the arrangertypically an investment bankinitiated the rating process by sending to the credit rating agency information about a prospective RMBS and data about the mortgage loans included in the prospective pool. The data typically identified the characteristics of each mortgage in the pool including: the principal amount, geographic location of the property, FICO score, loan to value ratio of the property, and type of loan . . . . (SPSI Report at 251.) 124. Susan Barnes, the North American Practice Leader for RMBS at S&P from 2005

to 2008, confirmed that the rating agencies relied upon investment banks like Goldman to provide accurate information about the loan pools: The securitization process relies on the quality of the data generated about the loans going into the securitizations. S&P relies on the data produced by others and reported to both S&P and investors about those loans . . . . S&P does not receive the original loan files for the loans in the pool. Those files are reviewed by the arranger or sponsor of the transaction, who is also responsible for reporting accurate information about the loans in the deal documents and offering documents to potential investors. (SPSI hearing testimony, April 23, 2010) (emphasis added). 125. As the SPSI found, Goldman and other banks used financially

engineering of credit ratings to give high risk assets the veneer of safety and low risk. (SPSI Report at 30.) The financial engineering came in numerous forms, including pressuring the rating agencies for favorable ratings and playing the rating agencies off one another with the threat of withholding future business if the sponsoring bank was not given favorable treatment. As detailed in the SPSI report: At the same time Moodys and S&P were pressuring their RMBS and CDO analysts to increase market share and revenues, the investment banks responsible for bringing RMBS and CDO business to the firms were pressuring those same analysts to ease rating standards. Former Moodys and S&P analysts and managers interviewed by the Subcommittee described, for example, how investment bankers pressured them to get their deals done quickly, increase the size of the tranches that received AAA ratings, and reduce the credit enhancements protecting the AAA tranches from loss. They also pressed the CRA analysts and managers to ignore a host of factors that could be seen as increasing credit risk. Sometimes described as ratings shopping, the analysts 43

described how some investment bankers threatened to take their business to another credit rating agency if they did not get the favorable treatment they wanted. The evidence collected by the Subcommittee indicates that the pressure exerted by investment banks frequently impacted the ratings process, enabling the banks to obtain more favorable treatment than they otherwise would have received. (SPSI Report at 278.) 126. As one S&P director put it in an August 8, 2006 email: [Our RMBS friends

have] become so beholden to their top issuers for revenue [that] they have all developed a kind of Stockholm syndrome which they mistakenly tag as Customer Value creation. Ratings analysts who complained about the pressure, or did not do as they were told, were quickly replaced on deals or terminated. 127. Summarizing the intense pressure investment banks put on ratings analysts to

provide favorable ratings, Richard Michalek, a former Moodys VP and Senior Credit Officer, testified before the SPSI that [t]he willingness to decline to rate, or to just say no, to proposed transactions, steadily diminished over time. That unwillingness to say no grew in parallel with the company share price and the proportion of total firm revenues represented by structured finance transactions . . . coincident with the steady drive toward commoditization of the instruments we were rating . . . . The threat of losing business . . . even if not realized, absolutely tilted the balance away from independent arbiter of risk towards captive facilitator of risk transfer. . . . The message from management was, must say yes. See also Written Statement of Eric Kolchinsky, Managing Director, Moodys Derivatives Group (Managers of rating groups were expected by their supervisors and ultimately the Board of Directors . . . to build, or at least maintain, market shares. It was an unspoken understanding that loss of market share would cause a manager to lose his or her job; [L]owering credit standards . . . was one easy way for a managing director to regain market share.)

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128.

The SPSI Report detailed specific pressure exerted by Goldman bankers on

ratings analysts. Michalek informed the SPSI that Goldman played the rating agencies off each other: Goldman Sachs was well known by the lawyers in the [Structured Products Derivatives Group] for consistently producing as their preferred form of document the most risk seller friendly precedent [i.e., the most favorable to Goldman Sachs], even if it had been drafted by a law firm other than the firm working for Goldman at the time. While Goldman Sachs was not the only investment bank that used the practice of rotating law firms, in part to gain access to the broadest selection of precedent documentation and thereby the greatest potential for finding a precedent that supported Goldmans preferred language, they were the only bank I knew of that employed someone whose primary job was to put it politely arbitrage the rating agencies. It was not difficult to know where Moodys stood in terms of the relative conservatism of our modeling assumptions and drafting requests; Goldman was very prompt when informing us that S&P doesnt require that. (Written Statement of Robert Michalek (emphasis added).) 129. Michalek testified before the SPSI that he was explicitly told by certain banks that

he was not welcome on certain deals and that, in at least one instance, he was told that a CDO team leader at Goldman Sachs also asked, while praising the thoroughness of my work, that after four transactions he would prefer another lawyer be given an opportunity to work on his deals. (SPSI Report at 286.) 130. On April 11, 2006, a Moodys analyst told colleagues, I am getting serious

pushback from Goldman on a deal that they want to go to market with today because the deal is coming out worse when compared to the last . . . deal. (SPSI Hearing Ex. 4/23-36.) Similarly, after a Goldman banker objected to a rating issued by S&P, stating [w]e therefore cannot settle for the most conservative alternative as I believe you are suggesting, the S&P analyst carved out an exception to its ratings methodology. (SPSI Report at 282.) 131. On April 11, 2008, an article in the Wall Street Journal confirmed that Moodys

switched analysts on Goldman deals after the bank complained. According to Mark Froeba, a 45

former Moodys senior VP, the fear was real, not rare and not at all healthy. You began to hear of analysts, even whole groups of analysts, at Moodys who had lost their jobs because they were doing their jobs, identifying risks and describing them accurately. (Id. at 275.) 132. In this pressurized environment where the only acceptable ratings were the ones

favored by the investment banks, Goldman was able to essentially pre-determine the ratings by feeding garbage into the ratings system. Goldmans willful and improper pressure upon the rating agencies to provide undeserved ratings rendered misleading Goldmans promises that the various tranches within a particular offering would obtain a certain initial rating and that those ratings would reflect the actual credit quality of the Certificate. Goldman failed to disclose that it, like other investment banks, routinely trampled upon the agencies independence and provided the agencies with false and misleading data. As Goldman knew, the rating agencies relied on these data, and that the ratings based on these data would not reflect the true credit risk associated with each tranche and Offering. F. 133. Originator-Specific Evidence That The Loans Were Generated Outside The Disclosed Guidelines As the SPSI Report found, Goldman underwrote securities using loans from

subprime lenders known for issuing high risk, poor quality mortgages, and sold risky securities to investors across the United States and around the world. (SPSI Report at 11.) Many of the loans came from now-notorious lenders such as Long Beach, IndyMac, and Fremontamong the Office of the Comptroller of the Currencys Worst Ten in the Worst Ten list of originators, ranked by default rates. (SPSI Report at 239.) Moodys later calculated that, in 2006 alone, Long Beach, New Century, and Fremont were responsible for 24% of the residential subprime mortgages backed securities issued, but 50% of the subsequent credit rating downgrades of those securities . . . [E]ach of these lenders issued billions of dollars in high risk, poor quality home

46

loans. (Id. at 239.) Even when securitizers kicked defective loans out of collateral pools, some of these originators, like Fremont, were known to put those defective loans into different mortgage pools for other securitizations, presumably hoping that the defects would be overlooked in the next pools sampling. (FCIC Report at 168.) 134. That Goldman purchased loans from mortgage lenders who had systematically

abandoned their stated guidelines is confirmed by the facts discussed below. Loans generated in accordance to the stated guidelines would not have experienced the levels of default seen among the loans underlying Allstates certificates, would not have had key features consistently and substantially misrepresented, and would not have triggered so many due diligence flags. The fact that the originators here had systematically abandoned their underwriting standards is further confirmed by governmental investigations, statements provided by former employees, and many other facts set forth below. 135. In sum, the originators simply made as many loans as they possibly could,

regardless of the borrowers ability to repay the loan, including by: Coaching borrowers to falsely inflate their income on loan applications to appear to qualify for mortgage loans that the borrowers could not afford to repay; Falsely inflating a prospective borrowers income to qualify the borrower for a loan he or she could not afford to repay; Steering borrowers to loans that exceeded their borrowing capacity; Encouraging borrowers to borrow more money than they could afford by guiding them to stated income loansloans on which the borrowers could simply make up, or state, inflated incomes that would not be verified; Approving borrowers based on teaser rates for loans, despite knowing that the borrower would not be able to afford the payment when the loan rate adjusted; and Allowing non-qualifying borrowers to be approved for loans they could not afford under exceptions to the underwriting standards based on so-called compensating

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factors when such compensating factors did not in fact exist or did not justify approving the loans. 136. The Senate Permanent Subcommittee on Investigations concluded that from

2004 to 2007, in exchange for lucrative fees, Goldman Sachs helped lenders like Long Beach, Fremont and New Century, securitize high risk, poor quality loans, obtain favorable credit ratings for the resulting [RMBSs], and sell the RMBS securities to investors, pushing billions of dollars of risky mortgages into the financial system. (SPSI Report at 377). (1) 137. IndyMac

This notorious lenders mortgages comprised more than 60% of the GSAMP

2006-S4 securitization. Nearly half of the Mortgage Loans in this Trust are delinquent or have been written off. IndyMacs underwriting guidelines are detailed in the Prospectus Supplement of GSAMP 2006-S4 and excerpted in Exhibit E. 138. IndyMacs subpar underwriting practices have made it the target of numerous

governmental investigations and lawsuits, including one recently filed by the SEC against S. Blair Abernathy, the former Executive Vice President and Chief Financial Officer of IndyMac Bancorp., Inc. The SEC complaint alleges numerous misrepresentations concerning owner occupancy, LTV ratios, and borrower creditworthiness. 139. Specifically, the Complaint alleges that IndyMac received internal reports that

12% to 18% of a random sample of loans in the mortgage pools contained misrepresentations of material information such as owner-occupancy rates and LTV ratios. Yet IndyMac did not notify investors or correct otherwise misleading disclosures in the offering documents. Mr. Abernathy has since agreed to settle the SECs charges. (SPSI Report at 235.) 140. As a result of faulty lending, originating, and underwriting practices, IndyMac

Bancorp, Inc. became the third-largest bank failure in U.S. history in July 2008.

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141.

A February 26, 2009 report issued by the Office of Inspector General (OIG) of

the U.S. Department of Treasury entitled Safety and Soundness: Material Loss Review of IndyMac Bank, FSB (the OIG Report) confirmed that the misstatements and omissions at issue here were part of a long history of systemic problems within IndyMac. The OIG Report confirms that IndyMac Bank was a company focused on aggressive growth without any regard to risk. IndyMac Bank ignored its stated underwriting guidelines and did not verify borrower income or assets. It originated as many loans as possible, as quickly as possible, in order to sell them to investment banks for inclusion in RMBS, without regard to the quality of the loans, the creditworthiness of the borrowers, or the value of the underlying collateral. (OIG Report at 2-3; SPSI Report at 234.) 142. To facilitate this level of [loan] production, [OIG] found that IndyMac often did

not perform adequate underwriting. (OIG Report at 21.) This aggressive growth strategy resulted in IndyMac Banks assets gr[owing] from nearly $5 billion [in mid-2000] to over $30 billion [in the first quarter of 2008] and was also [t]he primary cause[] of IndyMacs failure. (Id. at 2, 6.) 143. In its effort to produce as many loans as possible and sell them in the secondary

market, (Id. at 21), IndyMac Bank relaxed and effectively abandoned its underwriting standards to permit risky borrowers to qualify for Alt-A loans, sacrificing loan quality for quantity. IndyMac often made loans without verification of the borrowers income or assets, and to borrowers with poor credit histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. (Id. at 2.) Ultimately, IndyMac Bank was making loans to borrowers who simply could not afford to make their payments. (Id.) The OIG

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documented several examples of loans that it felt demonstrated IndyMac Banks high-risk activities over many years. (OIG Report at 4, 32, 71-74.) 144. In a June 2008 report entitled IndyMac: What Went Wrong? (CRL Report),

the Center for Responsible Lending (CRL) also found that IndyMac Bank often ignored its stated underwriting and appraisal standards and encouraged its employees to approve loans regardless of the borrowers ability to repay them. CRL based its report on interviews with former IndyMac employees and reviewed numerous lawsuits filed against IndyMac. The CRL Report summarized the results of its investigation as follows: IndyMacs story offers a body of evidence that discredits the notion that the mortgage crisis was caused by rogue brokers or by borrowers who lied to bankroll the purchase of bigger homes or investment properties. CRLs investigation indicates many of the problems at IndyMac were spawned by top-down pressures that valued short-term growth over protecting borrowers and shareholders interests over the long haul. (CRL Report at 1.) 145. For example, the CRL noted that IndyMac Bank engaged in unsound and

abusive lending practices dating back to at least 2003. Former IndyMac underwriters explained that low-doc loans were a big problem because the loans allowed outside mortgage brokers and in-house sales staffers to inflate applicants [financial information] . . . [to] make them look like better credit risks. (CRL Report at 2, 8.) In fact, the shoddily documented loans were known inside [IndyMac] as Disneyland loansin honor of a mortgage issued to a Disneyland cashier whose loan application claimed an income of $90,000 a year. (Id. at 3.) 146. The CRL Report stated that IndyMac pushed through loans with fudged or

falsified information, routinely making loans without regard to [the] borrowers ability to repay the loan. (Id.at 2.) Loan quality became a running joke among [IndyMacs] employees. (Id. at 3.)

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147.

The CRL also found evidence that managers pressured underwriters to disregard

IndyMacs underwriting guidelines in approving unsound loans, and that managers overruled decisions by underwriters to deny loan applications based upon falsified paperwork and inflated appraisals. As Wesley E. Miller, a mortgage underwriter for IndyMac in California from 2005 to 2007, told the CRL: [W]hen he rejected a loan, sales managers screamed at him and then went up the line to a senior vice president and got it okayed. Theres a lot of pressure when youre doing a deal and you know its wrong from the get-go that the guy cant afford it, Miller told CRL. And then they pressure you to approve it. The refrain from managers, Miller recalls, was simple: Find a way to make this work. (Id. at 9.) 148. Similarly, Audrey Streater, a former mortgage underwriting team leader at

IndyMac, stated that she would reject a loan and the insanity would begin. It would go to upper management and the next thing you know its going to closing. (Id. at 1, 3.) Streater further stated that the prevailing attitude at IndyMac was that underwriting was window dressinga procedural annoyance that was tolerated because loans needed an underwriters stamp of approval if they were going to be sold to investors. (Id. at 8) (emphasis added). 149. Scott Montilla, an IndyMac mortgage loan underwriter in Arizona during the

same time period, told the CRL his decision to reject loans would be overridden by IndyMac management about 50% of the time. (Id. at 9.) Moreover, according to Montilla and another IndyMac mortgage underwriter, many borrowers had their stated incomes inflated, without their knowledge, as part of the application process. (See id. at 14.) 150. In July 2010, certain former officers of IndyMacs Homebuilder Division were

sued by the FDIC, which alleged, among other things, that IndyMac disregarded its underwriting practices in approving loans to borrowers who were not creditworthy and for projects which 51

lacked sufficient collateral. See Complaint, FDIC v. Van Dellen, No 2:10-cv-04915-DSF, 6 (C.D. Cal. July 2, 2010). Additionally, IndyMac was sued in a class action lawsuit alleging that disregard of underwriting standards adversely affected the value of the purchased RMBS. See In re IndyMac Mortgage-Backed Sec. Litig., No. 09-4583 (S.D.N.Y. May 14, 2009). 151. In connection with lawsuits filed in California state court (MBIA Ins. Corp. v.

IndyMac ABS, Inc., No BC422358 (Super Ct. Los Angeles County) and the District of Columbia (MBIA Ins. Corp. v. IndyMac Bank, FSB, No 1:09-cv-01011-CCK (D.D.C.), MBIA obtained access to some of the complete loan files for thousands of IndyMac-originated loans that included the type of collateral, structure, timing, and disclosures that were all similar to those present here. Because it is just an investor, rather than an insurer like MBIA, Allstate does not currently have the same access to the loan files that MBIA was given. 152. MBIA found that a staggering 99 percent of the delinquent loans it reviewed did

not comply with IndyMacs stated underwriting guidelines. This further confirms that IndyMacs underwriting abandonment was systemic, infecting nearly all of the loans it was generatingincluding those at issue here. 153. In sum, numerous sources confirm that the representations made about IndyMacs

loans in the Offering Materials here were false. For instance, both the CRL Report and OIG Report confirm that statements made by IndyMacthat its underwriting guidelines include[] an analysis of the borrowers credit history, ability to repay the mortgage loan and the adequacy of the mortgaged property as collateral (GSAMP 2006-S4 Pro. Supp. at S-35) were untrue when made because IndyMac underwriters routinely . . . [made] loans without regard to borrowers ability to repay [them], and with little, if any, review of the borrower[s] qualifications, including income, assets, and employment. (CRL Report at 2; OIG Report at 11.)

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154.

Similarly, while Goldman represented that IndyMacs loans were based on

appraisals conducted in accordance with the Uniform Standards of Professional Appraisal Practice and that the appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value, (GSAMP 2006-S4 Pro. Supp. at S-37) in fact IndyMac officials accepted appraisals that were not in compliance with the Uniform Standard of Professional Appraisal Practice and IndyMac accepted appraisals where the property valuation was made without physical site inspection of the subject property or comparable properties. (OIG Report at 2, 12, 26.) (2) 155. Long Beach

Long Beach originated 35% of the loans in GSAMP Trust 2006-S3.

Approximately 56 percent of the Mortgage Loans in this Trust are delinquent or have been written off. Long Beachs underwriting guidelines are detailed in the Prospectus Supplement of GSAMP 2006-S3 and excerpted in Exhibit F. 156. According to the SPSI:

From 2000 to 2007, Long Beach and WaMu together securitized tens of billions of dollars in subprime loans, creating mortgage backed securities that frequently received AAA or other investment grade credit ratings. Although AAA securities are supposed to be very safe investments with low default rates of one to two percent, of the 75 Long Beach mortgage backed security tranches rated AAA by Standard and Poors in 2006, all 75 have been downgraded to junk status, defaulted, or been withdrawn. In most of the 2006 Long Beach securitizations, the underlying loans have delinquency rates of 50% or more. (SPSI Report at 55 (emphasis added).) 157. WaMu, Long Beach and Goldman collaborated on $14 billion in loan sales and

securitizations, and by February 2006, Long Beach had a $2 billion warehouse account with Goldman, which was at that time, the largest of Goldmans warehouse accounts. (Id at 513.)

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158.

The underwriting abandonment at Long Beach is confirmed by the internal

reviews conducted by its parent, Washington Mutual, released by the SPSI in 2011. One such review identified the top five priority issues as being: Appraisal deficiencies that could impact value and were not addressed[;] Material misrepresentations relating to credit evaluation were confirmed[;] Legal documents were missing or contained errors or discrepancies[;] Credit evaluation or loan decision errors[; and] Required credit documentation was insufficient or missing from the file. (SPSI Report at 82.) The report also found that deterioration was accelerating in recent vintages with each vintage since 2002 having performed worse than the prior vintage. (Id.) 159. Another internal audit released by the SPSI reached similar, damning conclusions:

[T]he overall system of risk management and internal controls has deficiencies related to multiple, critical origination and underwriting processes . . . . These deficiencies require immediate effective corrective action to limit continued exposure to losses . . . . Repeat IssueUnderwriting guidelines established to mitigate the risk of unsound underwriting decisions are not always followed . . . . Improvements in controls designed to ensure adherence to Exception Oversight Policy and Procedures is required . . . . [A]ccurate reporting and tracking of exceptions to policy does not exist. (SPSI Report at 84-85.) 160. A memorandum to the Washington Mutual, Inc. and WaMu Board of Directors

Audit Committees, dated April 7, 2006 (and released to the public in 2011 by the SPSI), entitled Long Beach Mortgage Company -Repurchase Reserve Root Cause Analysis states: [Long Beach] experienced a dramatic increase in [early payment defaults] during the third quarter of 2005. . . . [R]elaxed credit guidelines, breakdowns in manual underwriting processes, and inexperienced subprime personnel . . . coupled with a push to increase loan volume and the lack of an automated fraud monitoring tool, exacerbated the deterioration in loan quality. (SPSI Report Ex. 4/13-10 at 1-2.)

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161.

Yet another internal review, released to the public in 2011 by the SPSI, focused

on loans that defaulted on their very first payment. The review concluded that there were major weaknesses in the risk management processes, resulting in an unacceptable level of risk. (SPSI Report Ex. 4/13-21, WaMu Corporate Credit Review: Wholesale Specialty Lending-FPD at 2 (Sept. 28, 2007).) The report found confirmed fraud in 115 of the 187 files reviewed, red flags that were not addressed in 132 of the 187 files, and issued a repeat finding that there were underwriting deficiencies. (Id. at 3.) An amazing 71 percent of the stated-income loans were flagged as having unreasonable income claims, and numerous other errors (such as documentation errors and appraisal discrepancies) were found throughout the files. (Id.) 162. In sum, the Senate Subcommittee concluded:

Throughout the period reviewed by the Subcommittee, from 2004 until its demise in September 2007, Long Beach was plagued with problems . . . . Long Beach account executives were paid according to the volume of loans they originated, with little heed paid to loan quality. Throughout the period reviewed by the Subcommittee, Long Beachs subprime home loans and mortgage backed securities were among the worst performing in the subprime industry. Its loans repeatedly experienced early payment defaults, its securities had among the highest delinquencies in the market, and its unexpected losses and repurchase demands damaged its parent corporations financial results. Internal documentation from WaMu shows that senior management at the bank was fully aware of Long Beachs shoddy lending practices, but failed to correct them. (SPSI Report at 75.) 163. Similarly, the Office of Thrift Supervision (OTS) also reported concerns with

subprime underwriting practices by Long Beach. 164. In a June 2008 memorandum, entitled Loan Fraud Investigation, the OTS noted

the systematic nature of the problem: [T]he review defines an origination culture focused more heavily on production volume rather than quality. An example of this was a finding that production personnel were allowed to participate in aspects of the income, employment, or asset 55

verification process, a clear conflict of interest . . . . Prior OTS examinations have raised similar issues including the need to implement incentive compensation programs to place greater emphasis on loan quality. (SPSI Report Ex. 4/13-25.) 165. According to a complaint recently filed by Cambridge Place Investment

Management (Cambridge Place Investment Management v. Morgan Stanley & Co., No. 11-cv10992 (D. Mass. June 3, 2011)), Long Beach directed underwriters to approve, approve, approve and highlights the anything-goes lending practices at Long Beach: One Long Beach program made loans to self-employed borrowers based on three letters of reference from past employers. A former worker said some letters amounted to So-and-so cuts my lawn and does a good job, adding that the company made no attempt to verify the information, the complaint stated. 166. Therefore, contrary to the representations in the Offering Materials, Long Beach

did not undertake a good faith assessment of a prospective borrowers credit standing and repayment ability, and to evaluate the value and adequacy of the mortgaged property as collateral. (GSAMP 2006-HE7 Pro. Supp. at 29.) It did not review and verify the prospective borrowers source of income, credit scores and credit history. (Id.) It did not make reasonable determinations of the prospective borrowers ability to repay the loan. (Id.) And its long history of appraisal violations make clear that Long Beach did not determine whether the mortgaged property complies with Long Beachs underwriting guidelines. (Id. at S-38.) (3) 167. Fremont

Fremont originated 54% of the loans in GSAMP Trust 2006-S3 and a smaller

percentage of the loans in GSAMP Trust 2006-S4. Fremonts underwriting guidelines are detailed in the Prospectus Supplement of GSAMP 2006-S3 and excerpted in Exhibit F. 168. According to the Senate Permanent Subcommittee: 56

Fremont Investment & Loan was once the fifth largest subprime mortgage lender in the United States. At its peak in 2006, it had $13 billion in assets, 3,500 employees, and nearly two dozen offices. Fremont Investment & Loan was neither a bank nor a thrift, but an industrial loan company that issued loans and held insured deposits. . . . . In June 2008, Fremont General Corporation declared bankruptcy under Chapter 11 . . . . (SPSI Report at 237-38.) 169. The SPSI Report singled out Goldman as being one of Fremonts primary

customers despite knowing that Fremont originated poor quality loans: In a November 2006 exchange of emails, for example, two Goldman sales representatives were discussing trying to sell Fremont RMBS securities to a client. One salesperson forwarded to the other the clients explanation of why it did not want to buy the securities and its low opinion of Fremonts loan pools: Fremont refused to make any forward looking statements so we really got nothing from them on the crap pools that are out there now. ... Despite these and other indications of Fremonts poor quality loans, Goldman continued to underwrite and market securities backed by Fremont loans. In an internal February 2007 memorandum to its Mortgage Capital Committee, Goldman wrote that it had a significant relationship with Fremont, based upon past securitizations, whole loan purchases, and warehouse fees. In March 2007, at the same time it was sending millions of dollars in loan repurchase requests to Fremont, Goldman securitized over $1 billion in Fremont subprime loans in one of its warehouse accounts, originating GSAMP Trust 2007-FM2. ... Goldman marketed and sold the Fremont securities to its customers, while at the same time purchasing $15 million in CDS contracts referencing some of the Fremont securities it underwrote . . . . [B]y August 2009, every tranche in the GSAMP securitization had been downgraded to junk status. (SPSI Report at 515-16 (emphasis added).) 170. On June 9, 2009, Massachusetts Attorney General Martha Coakley announced a

$10 million settlement with Fremont resolving allegations that the company had knowingly sold risky loan products that were designed to fail, such as 100% financing loans and no documentation loans. The Attorney Generals complaint had specifically charged that:

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Fremont issued thousands of subprime loans, with multiple layers of risk, through mortgage brokers who regularly provided Fremont with false information that Fremont intentionally, recklessly or negligently failed to verify or audit . . . . Fremont knew or should have known substantial numbers of its subprime loans, especially absent prompt refinancing, would foreseeably fail and result in foreclosure, but nonetheless made the loans to promptly package and sell to the secondary market. 171. Roger Ehrnman, Fremonts former regulatory compliance and risk manager,

substantiated the findings of the Massachusetts Attorney General and the FDIC, when he told the FCIC that Fremont repeatedly attempted to place rejected loans into the pools of mortgages that were to be sold to investors and had a policy of putting loans into subsequent pools until they were kicked out three times. (FCIC Report at 168.) This practice has been confirmed by confidential witness testimony, discussed below. 172. Former Fremont employees confirm the governments findings regarding the

companys improper loan origination. Confidential Witness 1 (CW1) worked at Fremont in 2006 and 2007, and before that at a title-insurance company that appraised mortgages as part of banks due diligence on loan purchases. At Fremont, CW1 was responsible for working with investment banks, including Goldman, that purchased the companys mortgage loans. 173. CW1 explained that banks, like Goldman, knew that some of the loans they

purchased had underwriting problems, but bought the loans anyway. In some cases the banks rejected loans after an initial review but purchased them later after lengthy meetings during which Fremont advocated for loans on a case-by-case basis. Indeed, the banks used their knowledge of the questionable loans characteristics as a bargaining chip, negotiating with Fremont for lower prices on the loans, rather than rejecting the loans outright as they should have done.

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174.

CW1 said that purchasers sometimes balked over quality problems with the

loans, but the balking seemed primarily a negotiating tool to lower the purchase price of the loans. 175. CW1 said that at least 10% of loan files that she reviewed lacked signatures on

key documents, were poorly photocopied, or raised other compliance issues that should have resulted in loans being rejected. She said that in some cases Goldman and other banks purchased loans even where the photographs of mortgaged properties clearly did not match the description of comparable properties used to appraise the subject property. It should have been a red flag to the buyers, for example, if the mortgaged property was a cottage made out of wood but the supposedly comparable properties used to appraise the property were large houses made out of brick. 176. CW1 explained that investment banks knowingly purchased faulty mortgage

loans because their appetite for loans to securitize was so crazy during the 2004 to 2006 time period. The banks needed loans, good or bad, as collateral for their RMBS. Moreover, the banks had purchase agreements with Fremont which required them to buy a certain percentage of offered loans; the agreements were negotiated even before the banks received information about the loans for sale. 177. Overall, during the 2004 to 2006 period, CW1 said that investment banks bought

96 to 98 percent of the loans that the company offered for sale. They bought almost all of Fremonts loans even though sampling showed that a substantial portion of the loans were questionable. 178. Further, according to CW1, Fremont employees were pressured to sell

problematic loans. CW1 said Fremont employees were pressured not to review property

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appraisals too closely, since problems with the appraisals that could result in rejecting a loan would have to be reviewed by management. On one occasion, CW1 looked into why banks were not buying certain loans, and she made recommendations to Fremonts management based on her findings, with a goal of improving loan origination, but management turned a blind eye to her recommendations. 179. CW1 also reports that Fremont collected the worst loans, the ones that were so

defective that no [bank] would purchase them, into reconstituted pools of scratch and dent loans. These loans included ones where the borrower had defaulted on their mortgage within 30 days of origination. The borrowers income or the propertys value may have been inflated, or the borrowers intention to live in the property may have been misstated. After buyers initially rejected such scratch and dent loans, Fremont sometimes added the bad loans to subsequent loan pools for sale, in hopes that the banks would buy them on a second or third pass. 180. Confidential Witness 2 (CW2), a former Senior Loan Processor at Fremont who

worked between 2001 and 2007, likewise remembers seeing bad loans, particularly statedincome loans where the borrowers had suspiciously high salariesfor example, a waitress was making an obscene amount of money for her position. 181. CW2 also reported that Fremonts management conveyed an urgency to

approve loans as quickly as possible so we can sell them, with an implication that loan quality may need to be compromised to do so. 182. Confidential Witness 3 (CW3), a former Fremont executive that CW1 reported

to, agreed that banks kn[e]w exactly the nature of the loans they [were] purchasing because of information the banks received from Clayton and other due-diligence firms. CW3 agreed that

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for a while banks bought anything from originators such as Fremont. CW3 said its a given that loosely-underwritten loans werent good. 183. Confidential Witness 4 (CW4), a former Compliance Manager at Fremont, said

he found through auditing Fremonts loan files that the documentation was often very poor. CW4 raised concerns about the files to his supervisors but they were not receptive. CW4 said that Fremonts compliance staffing was very low because compliance was a cost and it impeded lending activity. CW4 believes employees were incentivized not to report compliance problems to keep costs down, and that suspicious lending was underreported. 184. Confidential Witness 5 (CW5), a former Senior Account Manager at Fremont,

also agreed that there were dubious loans originated when she worked at the company, between 2002 and 2004 and then from 2006 to 2007. CW5 said employees were sometimes pressured by their supervisors to approve loans with questionable documentation, and that underwriting standards were stretched pretty thin to get loans approved. 185. The Fremont loan officers that issued mortgages to individuals were also driven

by greed to cut corners and overlook bad loans. CW1 thinks that the majority of brokers were unscrupulous and dishonest during the heyday of loan origination in the 2004 to 2006 period. She also believes there was collusion between brokers, realtors, and appraisers. CW2 said that inflated appraisals became a joke amongst Fremont employees, and that it seemed obvious that appraisers were not impartial and engaged in a lot of shady stuff, specifically submitting inflated home valuations. CW2 thought there was a lot of fraud by borrowers and brokers in submitting fraudulent paystubs and bad appraisals, particularly loans originated in Miami and California (which were areas of property speculation and house-flipping during the heyday of the mortgage boom).

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186.

Senator Carl Levin, at an SPSI hearing, identified Fremont as a lender known for

poor quality loans underlying Goldmans securitizations. Wall Street and the Financial Crisis: The Role of Credit Rating Agencies (Apr. 23, 2010). Senator Levin described how an analyst with S&P raised concerns about the quality of Fremont-originated loans in a Goldman RMBS offering: In January 2007, S&P was asked to rate an RMBS being assembled by Goldman Sachs using subprime loans from Fremont Investment and Loan, a subprime lender known for loans with high rates of delinquency. On January 24, 2007, an analyst wrote seeking advice from two senior analysts: I have a Goldman deal with subprime Fremont collateral. Since Fremont collateral has been performing not so good, is there anything special I should be aware of? One analyst responded: No, we dont treat their collateral any differently. The other asked: are the FICO scores current? Yup, came the reply. Then You are good to go. In other words, the analyst didnt have to factor in any greater credit risk for an issuer known for poor quality loans . . . . 187. The above facts confirm that Goldmans claim in the Offering Materials that

Fremont verif[ies] the income of each applicant, applies quality control procedures, and issued loans based on good faith evaluations of the ability and willingness of the borrower to repay debt and adequacy of the mortgaged property as collateral for the mortgage loan were all false. (4) 188. Aames

A portion of the Mortgage Loans in GSAMP 2006-HE5 and GSAMP 2006-HE7

(approximately 29% and 22%, respectively) were purchased from Aames Capital Corporation. Approximately 50% and 49% percent of the Mortgage Loans in these Trusts, respectively, are delinquent or have been written off. Aames underwriting guidelines are detailed in the Prospectus Supplement of GSAMP 2006-HE5 and HE7 and excerpted in Exhibits C and D.

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189.

Prior to its 2006 acquisition by Accredited Home Lenders Holding Co., Aames

Capital Corporation and its affiliates originated, sold and serviced subprime residential mortgages under the names Aames Home Loans. In 2006, Aames was purchased by Accredited Home Lenders, Inc. Accredited, like all of the other originators discussed above, has been the target of lawsuits arising from its subprime origination practices and violations of reasonable underwriting and appraisal standards. Allegations include that senior managers in Accredited sales divisions frequently overruled decisions by their underwriters to reject loans in order to continue to pump out mortgages and increase profits. The number of overrides became so large that the originators were forced to institute a system to track such overrides and to note when loans were made as a business decision over the recommendation of the underwriter. 190. Accredited similarly allowed corporate underwriters and sales managers to

override the decision of licensed property appraisers in order to ensure that loans were closed. Frequently, when an appraisal reviewer would conclude that an appraisal had been inflated and reject a loan application, the account executive who submitted the loan application would appeal the rejection to a sales manager who, without valid reason, would then issue an override. Overrides were so frequent that by June 2006, over 10% of Accrediteds total loans resulted from management overrides. 191. A senior underwriter at Accredited from October 2006 through March 2007 in its

Irvine, California office, stated that he was frequently pressured by senior managers to make exceptions to the companys standard underwriting procedures. 192. On May 1, 2009, Accredited filed for bankruptcy. In bankruptcy filings,

Accredited has disclosed that it faces more than $200 million in repurchase claims.

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193.

Violations of underwriting and appraisal standards were also commonplace at

Aames in an effort to reach monthly production targets. Aames aggressiveness extended to making loans to low-income, elderly borrowers without regard to their ability to continue to fund the ongoing mortgage payment as long as the potential borrower purportedly had substantial equity in the property. A mailer sent to elderly low-income borrowers indicates the companys aggressiveness. The mailer highlighted that [e]ven if you have credit problems, we can probably still help you out. Thats because its your equity, not your income or credit that matters most. As discussed in further detail below, when Goldman began seeking to put back low-quality mortgages to originators, a substantial amount of them were put back to Accredited, which likely included Aames mortgages. 194. An independent appraiser from Florida who was approved by originators,

including Aames, stated that she was told by brokers and/or lenders that: WE NEED THIS NUMBER, OR YOU WILL NEVER WORK FOR US AGAIN. In order to stay in business she gave the valuations the broker or lender demanded, even if it required driving 20 miles away for a comparable sale. 195. The above facts confirm that the Offering Materials make false claims about the

quality of Aames underwriting guidelines, including that Aames Fundings underwriting guidelines were designed to assess the borrowers creditworthiness and the adequacy of the real property as collateral for the loan. (GSAMP 2006-HE7 Pro. Supp. at S-48.) (5) 196. American Home Mortgage Corporation

Approximately 38% of GSAMP 2006-S4 is comprised of mortgages originated by

American Home. American Homes underwriting guidelines are detailed in the Prospectus Supplement of GSAMP 2006-S4 and excerpted in Exhibit E.

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197.

The Offering Materials for the GSAMP 2006-S4 securitization represented that

AHMCs underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower file, the level of documentation provided and the property used to collateralize the debt. (GSAMP 2006-S4 Pro. Supp. at S-39.) They also represented that [e]xceptions to the underwriting standards may be permitted where compensating factors are present. (Id.) 198. These and other representations about American Homes underwriting guidelines

were false. Underwriters at American Home habitually violated underwriting guidelines in order to appease sales managers and meet production targets. They did not weigh all the risk factors inherent in a loan file, nor were underwriters encouraged to use professional judgment based on their experience. Instead, the underwriters were often overridden despite a lack of any purported compensating factors. As with the industry generally, American Home was driven to commit these errors because by selling the loans into securitization programs, it was receiving fees that offset its risk. 199. The Securities and Exchange Commission brought fraud charges against the

former top executives of American Home for their role in misleading investors about American Homes systematic disregard for sound underwriting standards, and for its use of risky lending practices that led to American Homes demise. American Home was anything but the prime lender it represented itself to be; instead, it routinely issued high-risk loans to borrowers with poor credit in order to drive growth and capture additional yield. American Homes former CEO paid $2.5 million to settle the SECs fraud charges. 200. As reflected in an October 2005 internal American Home Credit Update

presentation, made available to the public by the SPSI in 2011, the companys underwriting

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guidelines became so loose as to be rendered essentially meaningless. Specifically, the internal credit update explained that these new guideline interpretations included: (i) not requiring verification of income sources on stated income loans; (ii) reducing the minimum amount of time from the date in which the borrower was in bankruptcy or credit counseling; (iii) reducing the required documentation for self-employed borrowers; and (iv) broadening the acceptable use of second and third loans to cover the full property value. 201. Indeed, American Home would make a loan to virtually any borrower regardless

of the borrowers ability to verify income, assets or even employment, as was made clear in an internal American Home e-mail sent on November 2, 2006 by an American Home Senior Vice President and co-creator of American Homes Choice Point Loans program. Furthermore, in that email loan officers were encouraged to make loans of a type that were inherently risky and highly susceptible to delinquencies and default. These included (1) stated income loans, where both a borrowers income and assets were taken as stated on the credit application, without verification; (2) NINA or No Income, No Asset loans, which were made without any disclosure of a borrowers income or assets; and (3) No Doc loans, which allowed a borrower to apply for a loan without disclosing either income, assets or employment history. 202. The OCC crowned American Home as the eleventh worst mortgage originator in

the United States based on the foreclosure rates of mortgage loans originated in metropolitan areas between 2005 and 2007. It made the top 10 in 2008, including ranking even higher in many key major metropolitan areas. 203. Edmund Andrews, an economics reporter for the New York Times, recounted his

own experience using American Home as a lender. According to Andrews, he was looking to purchase a home in 2004, and his real estate agent referred him to a loan officer at American

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Home. The American Home loan officer began by asking Andrews how large of a loan he needed. Andrews, who had a monthly take home pay of $2,777, advised the loan officer that he had hefty child support and alimony payments to an ex-wife. Andrews would be relying on his then-unemployed fiance to earn enough money to meet his monthly obligationsincluding the mortgage. 204. Andrews reported:

As I quickly found out, American Home Mortgage had become one of the fastest-growing mortgage lenders in the country. One of its specialties was serving people just like me: borrowers with good credit scores who wanted to stretch their finances far beyond what our incomes could justify. In industry jargon, we were Alt-A customers, and we usually paid slightly higher rates for the privilege of concealing our financial weaknesses. I thought I knew a lot about go-go mortgages. I had already written several articles about the explosive growth of liars loans, no-money-down loans, interest-only loans and other even more exotic mortgages. I had interviewed people with very modest incomes who had taken out big loans. Yet for all that, I was stunned at how much money people were willing to throw at me. [The American Home loan officer] called back the next morning. Your credit scores are almost perfect, he said happily. Based on your income, you can qualify for a mortgage of about $500,000. What about my alimony and child-support obligations? No need to mention them. What would happen when they saw the automatic withholdings in my paycheck? No need to show them. If I wanted to buy a house, [the American Home loan officer] figured, it was my job to decide whether I could afford it. His job was to make it happen. I am here to enable dreams, he explained to me long afterward. [The American Home loan officer]s view was that if Id been unemployed for seven years and didnt have a dime to my name but I wanted a house, he wouldnt question my prudence. Who am I to tell you that you shouldnt do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, its your signature on the mortgage not mine. Edmund L. Andrews, My Personal Credit Crisis, N.Y. TIMES, May 17, 2009, at MM46. 205. The American Home loan officer steered Andrews to a stated-income loan so that

he would not have to produce paychecks or tax returns that would reveal his alimony and child

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support obligations. The loan officer wanted to limit disclosure of Andrewss alimony and child support payments when an existing mortgage showed up under Andrewss name. Although his ex-wife was solely responsible for that mortgage under the terms of the couples separation agreement, the only way Andrews could explain that fact would be to produce the agreement, which would also reveal his alimony and child support obligations. According to Andrews: [The American Home loan officer] didnt get flustered. If Plan A didnt work, he would simply move down another step on the ladder of credibility. Instead of stating my income without documenting it, I would take out a no ratio mortgage and not state my income at all. For the price of a slightly higher interest rate, American Home would verify my assets, but that was it. Because I wasnt stating my income, I couldnt have a debt-to-income ratio, and therefore, I couldnt have too much debt. I could have had four other mortgages, and it wouldnt have mattered. American Home was practically begging me to take the money. Id. 206. American Home ultimately approved Andrewss application. Not surprisingly,

Andrews was unable to afford his monthly mortgage payments. 207. American Home has been the subject of a number of lawsuits arising out of its

lending practices, which allege, among other things, that American Home misrepresented or failed to disclose material information concerning its financial condition and prospects. These include a suit filed by the Ohio Attorney General in 2009 claiming numerous violations of the Ohio Consumer Sales Practices Act, including allegations of unfair and deceptive loan modification terms. (6) 208. NovaStar

The SPSI found that Goldman in 2006/early 2007 had specific concerns about the

credit quality of the loans issued by NovaStar. Yet Goldman stuffed substantial quantities of its loans, approximately 19%, into the collateral pool of GSAMP Trust 2006-HE7.

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209.

On April 2, 2008, NovaStar disclosed that more than half a dozen regulators and

law enforcement authorities, including the FBI, the SEC, the Federal Trade Commission (FTC), the United States Department of Justice (DOJ), the United States Department of Housing and Urban Development (HUD), the United States Department of Labor, and the Office of the Attorney General of New York State, had requested information regarding NovaStars origination and underwriting practices. 210. Other reports confirm that NovaStar granted loans to borrowers who did not have

a realistic chance of repaying them, and misled borrowers about the fact NovaStar was placing them in products ill-suited to their financial situations. For instance, the New York Times reported of a couple caught in the trap of a misrepresented adjustable-rate mortgage: The Jordans are fighting a foreclosure on their home of 25 years that they say was a result of an abusive and predatory loan made by NovaStar Mortgage Inc. A lender that had been cited by the Department of Housing and Urban Development for improprieties, like widely hiring outside contractors as loan officers, NovaStar ran out of cash in 2007 and is no longer making loans. ... The facts surrounding the Jordans case are depressingly familiar. In 2004, interested in refinancing their adjustable-rate mortgage as a fixed-rate loan, they said they were promised by NovaStar that they would receive one. In actuality, their lawsuit says, they received a $124,000 loan with an initial interest rate of 10.45 percent that could rise as high as 17.45 percent over the life of the loan. Mrs. Jordan, 66, said that she and her husband, who is disabled, provided NovaStar with full documentation of their pension, annuity and Social Security statements showing that their net monthly income was $2,697. That meant that the initial mortgage payment on the new loan$1,215amounted to 45 percent of the Jordans monthly net income. The Jordans were charged $5,934 when they took on the mortgage, almost 5 percent of the loan amount. The loan proceeds paid off the previous mortgage, $11,000 in debts and provided them with $9,616 in cash. Neither of the Jordans knew the loan was adjustable until two years after the closing, according to the lawsuit. That was when they began getting notices of an interest-rate increase from Nova- Star. The monthly payment is now $1,385.

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I got duped, Mrs. Jordan said. They knew how much money we got each month. Next thing I know I couldnt buy anything to eat and I couldnt pay my other bills. Gretchen Morgenson, Looking for The Lenders Little Helpers, N.Y. TIMES, July 12, 2009. 211. Investor Michael Burry studied NovaStars underwriting practices, as reported by

The Pitch in May 2010: One of the subprime-loan originators that Burry studied was NovaStar, a company that started in Westwood and later moved into an office building off Ward Parkway. NovaStar specialized in making home loans to people with shaky credit. Burry noticed when NovaStar began issuing loans of increasingly crappy quality. From early 2004 to late 2005, the number of NovaStar borrowers taking out interest-only loansno money down!nearly quintupled. The charade lasted until home prices stopped growing at an unprecedented clip and sketchy borrowers began to default on their tricked-out loans. ... NovaStar, a company that the New York Times labeled Exhibit A for anyone interested in the goofy lending practices which precipitated the housing collapse, was eventually delisted from the New York Stock Exchange. David Martin, Hailed as a Rebel Reformer, KC Fed Chief Tom Hoenig is Really Neither, THE PITCH, May 13, 2010, available at http://www.pitch.com/2010-05-13/news/kc-fed-chief-tomhoenig-is-no-rebel/. III. EVIDENCE THAT GOLDMAN KNEW ITS REPRESENTATIONS WERE UNTRUE AND MISLEADING 212. The Certificates here have experienced severe performance problems. Allstates

analysis also revealed that the underlying loans were consistently misrepresented, by large margins. These statistics are not just evidence that the Mortgage Loans were misrepresented. The consistency of the problems here are strong evidence that Goldman knew the Mortgage Loans were misrepresented. Goldmanwhich, as discussed below, benefited from a direct

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window into the lax origination practices that led to the creation of these loanscould not have innocently pooled, purchased, and securitized such a consistently misreported set of loans. This is not just to say that Goldman must have knownit is to show that Goldman did know. A. Evidence Regarding Goldmans Due Diligence (1) 213. Goldmans Due Diligence Benefitted From A Direct Window Into The Originators Practices

In connection with its purchase of the Mortgage Loans from the loan originators,

and consistent with industry practice, Goldman performed due diligence to determine the quality of the loans it was purchasing. Specifically, Goldman operated quality assurance and risk management departments tasked with discovering whether the loans met the stated standards. Goldman conducted due diligence on the originators it was purchasing loans from, and on the loans included in each offering to ensure compliance with the approved underwriting guidelines. 214. To make a determination about the quality of the loans and of the originators,

Goldman employed a team of underwriters who reviewed a sample of the purchased loans to confirm that they both conformed to the representations made by the originators and complied with the stated credit policies. 215. Indeed, Goldman acquired the securitized loans through two primary channels:

bulk acquisitions in the secondary market, or the GS Conduit Program. Goldmans Offering Materials represented that, in both channels, Goldman conducted due diligence on the lenders who originated the loans, and carefully inspected their underwriting standards: Prior to acquiring any residential mortgage loans, GSMC will conduct a review of the related mortgage loan seller. GSMCs review process consists of reviewing select financial information for credit and risk assessment and underwriting guideline review, senior level management discussion and background checks. The scope of the mortgage loan due diligence will depend on the credit

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quality of the mortgage loans. (GSAMP 2006-HE7 Pro. Supp. at S-56.) According to the Offering Materials, the underwriting guideline review considers mortgage loan origination processes and systems. In addition, such review considers corporate policy and procedures relating to state and federal predatory lending and high cost lending laws, origination practices by jurisdiction, historical loan level loss experience, quality control practices, significant litigation and material investors. Similar misrepresentations are made in the Offering Materials for all the Certificates. 216. Goldman also stated that it re-underwrote sample pools of the loans it purchased

to inspect for compliance. According to the Offering Materials for GSAMP 2006-HE7, [w]e may elect to re-underwrite some of the mortgage loans based upon our own criteria. (GSAMP 2006-HE7 Prospectus at 29; Pro. Supp. at S-56; see also id. at 29 ([w]e may, in connection with the acquisition of mortgage loans, re-underwrite the mortgage loans based upon criteria we believe are appropriate depending to some extent on our or our affiliates prior experience with the lender and the servicer, as well as our prior experience with a particular type of loan or with loans relating to mortgaged properties in a particular geographical region. A standard approach to re-underwriting will be to compare loan file information and information that is represented to us on a tape with respect to a percentage of the mortgage loans we deem appropriate in the circumstances.) Similar representations are made in the Offering Materials for all of the Certificates. See also SPSI Report at 483 (Goldman, either directly or through a third party due diligence firm, routinely conducted due diligence review of the mortgage loan pools it bought from lenders or third party brokers for use in its securitizations.) Thus, Goldman could not have pooled the Mortgage Loans underlying Allstates Certificates without knowing that, contrary to its representations, the loans were widely defective.

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217.

In both channels, Goldman participated in mortgage sale auctions held by the

originators. Goldman typically set the criteria for the loans it wished to buy and was given access to loan files. Prior to the auction, the originators would provide bid sheets that would specify, among other things, the percentage of the loans on which Goldman would be permitted to conduct due diligence. The originators also provided Goldman with a loan tape that described characteristics of the mortgage pool, including owner occupancy rates, loan-to-value ratios and other statistics relevant to the borrowers ability to repay. 218. Based upon this information, Goldman prepared its bid at loan auctions and

determined the prices at which it would purchase loans. If Goldman won the auction, it would be allowed to conduct additional due diligence on the loans prior to the settlement date. Based on the number of problem loans found, Goldman or a due diligence firm it hired for this purpose extrapolated the total percentage of problem loans likely contained in the pool. This information was then factored into the price Goldman paid for the pool. 219. Indeed, the very first step in creating an RMBS securitizationgiving a loan to a

homebuyerwas often done with Goldmans funds. Goldman provided warehouse lines of credit to originators.1 In other words, Goldman provided money to originators to fund the mortgages they were granting; Goldmans warehouse loan was then repaid when the originators loan pool was sold to Goldman for securitization. As the FCIC found: Under Paulsons leadership, Goldman Sachs had played a central role in the creation and sale of mortgage securities. From 2004 through 2006, the company provided billions of dollars in loans to mortgage lenders; most went to the subprime lenders Ameriquest, Long Beach, Fremont, New Century, and Countrywide through warehouse lines of credit, often in the form of repos. During the same period, Goldman acquired $53 billion of
See, e.g., GSAMP Trust 2006-HE7 Pro. Supp. at S-56 (GSMC provides warehouse and repurchase financing to mortgage lenders. . . .); SPSI Report at 515 (February 2007 memorandum from Goldman employee, telling colleagues that Goldman had a significant relationship with Fremont, based in part, on warehouse lending activities, and recommended the renewal of the existing $1 billion . . . 1-year revolving warehouse facility with Fremont.)
1

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loans from these and other subprime loan originators, which it securitized and sold to investors. From 2004 to 2006, Goldman issued 318 mortgage securitizations totaling $184 billion (about a quarter were subprime), and 63 CDOs totaling $32 billion; Goldman also issued 22 synthetic or hybrid CDOs with a face value of $35 billion between 2004 and June 2006. (FCIC Report at 142) 220. Consequently, Goldmans longstanding relationships with the problematic

originators, and its numerous roles in the securitization chain, made it uniquely positioned to know the originators had abandoned their underwriting guidelines. 221. These warehouse lines gave Goldman the inside track on acquiring the loans that

were generated using Goldman funds. They allowed Goldman to control the origination practices of these lenders and gave Goldman an inside look into the true quality of the loans they originated. As one industry publication explained, warehouse lenders like Goldman have detailed knowledge of the lenders operations. (Kevin Connor, Wall Street and the Making of the Subprime Disaster, November 2007 at 11.) 222. Because of its financial arrangements with warehouse lenders, Goldman was

essentially committed to buying the loans that secured its warehouse lines regardless of their quality and the results of Goldmans due diligence. Indeed, Goldman needed to purchase the loans with little or no objection so as to keep the lenders supplied with capital to pay fees and interest owed on the lines of credit. It was also important to Goldman that it protect its business relationships with warehouse lenders in order to ensure a steady flow of loans for securitization. Therefore, Goldman was incentivized to allow defective mortgages to remain in the securitizations because: (1) mortgage originators would not maintain a relationship with a bank that consistently kicked out large numbers of loans; and (2) the securitization became smaller as loans were kicked out, thus decreasing the underwriting fees and other fees.

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(2) 223.

Third-Party Due Diligence Data Confirms Goldman Was Made Aware, On A Daily Basis, Of The Number Of Non-Performing Loans

The loans and the originators here both suffer from serious defects. Any

reasonable due diligence process fed by Goldmans many sources of information would have caught such consistent, glaring problems. Goldmans own due diligence revealed that a significant percentage of loans failed to meet the applicable underwriting standards, yet they were included in the securitization pools anyway. Documents recently released by Goldmans third-party due diligence firm, Clayton, confirm that was Goldmans modus operandi. 224. As discussed above, according to an internal Clayton Trending Report made

public by the government in conjunction with testimony given in September 2010, Goldman Sachs was informed that 23% of the loans Clayton reviewed for Goldman failed to meet guidelines. These loans were not subject to any proper exceptions, as they did not have any compensating factors. Rather, these loans were plainly defective. 225. With such a high failure rate, the proper response would be to reject the pool

outright, and to seriously investigate whether that originator could be considered a trusted source of loans in the future. Even assuming Goldman incredibly believed a 23% failure rate could be chalked up to sampling error (due to the fact that Clayton Holdings did not review every loan in a pool), the proper response would be to increase the sample size to test that hypothesis. 226. Goldman did neither. It not only continued to work with problematic originators,

but, rather than expanding the sample size to truly investigate the problems, it simply disregarded, and did not disclose, the red flags Claytons results showed. According to Claytons Trending Report, Goldman waived in to its pools 29% of those toxic loans that Clayton had identified as being outside the guidelines.

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227.

Claytons Trending Report provides compelling evidence that Goldman knew it

was securitizing defective loans and selling the resulting securities to investors like Allstate. According to the September 2010 testimony of Claytons Vice President Vicki Beal, through its numerous roles of underwriter, sponsor, and depositor, Goldman was made fully aware on a daily basis that a significant percentage of its loans failed to meet stated underwriting guidelines, but were being included in the pools underlying securities sold to investors, like the Certificates sold to Allstate. 228. Goldman was not content to simply let poor loans pass into securitizations in

exchange for its fees and repayment of its warehouse loans. Goldman took the fraud further, affirmatively seeking to profit from this knowledge. Rather than rejecting these loans from the loan pool, as it should have, Goldman used the evidence of underwriting defects to negotiate lower prices for the loans and thus boost Goldmans own profits. According to the September 2010 FCIC testimony of Claytons former president, D. Keith Johnson, the investment banks would use the exception reports to force a lower price. In other words, rather than reject defective loans from collateral pools, or cease doing business with consistently failing originators, investment banks like Goldman would instead use the Clayton Holdings data simply to insist on a lower price from the loan originators, leaving more room for its own profits when the problem loans were hidden in securitization pools. 229. Goldman further sought to leverage this information in its warehouse lending

business. Goldman used the discovery of poor lending practices to increase its profitsby charging higher warehouse fees to those originators identified as being problematic. (FCIC Report at 484 (citing Goldman email dated Feb. 2, 2007 which discussed proposal to charge

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higher warehouse fees to mortgage originators with higher EPD [early payment default] and drop out rates, including Fremont).) 230. The high rejection and waiver rates are made even more damning by the fact that

Clayton was under extreme pressure to give as many loans as possible a pass, and conducted increasingly cursory reviews. Thus, Goldman knew the true rates of defects were actually much higher, and that it was allowing in even more defective loans than Claytons Trending Reports have since revealed. This, as well as the fact Goldman had knowledge of the high rates at which the loans it was securitizing were being rejected, is confirmed by the testimony of numerous confidential witnesses. 231. For example, Confidential Witness 6 (CW6) was an Underwriting Project Lead

at Clayton from 2003 until October 2006. At various times, CW6 also worked as a QC Underwriter, reviewing the work conducted by other Project Leads. According to CW6, the task of a Project Lead included having direct dealings with the client representative, i.e., a Goldman representative in this case. 232. According to CW6, the quality and experience of Claytons underwriters

decreased as Clayton hired more and more underwriters during the real estate boom. Many underwriters were in their twenties, and some even in their late teens without much, if any, professional underwriting experience. 233. According to CW6, the review process typically began with receipt of a loan

tape containing data on what the loans features were supposed to bee.g., whether they were owner-occupied or not, what their LTV ratios were, and the documentation process used to grant the loan. The purposes of Claytons diligence, in CW6s view, was to ensure that the actual loan files supported the descriptions of the loans contained in the loan tapes, and to evaluate the

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loans to ensure that the loan fell within the underwriters guidelines. Loans given a 3 grade were to be kicked from the loan pools. 234. While CW6 was employed, a lot of 3s were changed to 2s and 1s. Loans that

were missing documentation that was later supplied by the lender or the client could be re-graded during a stip clearing process. But according to CW6, others were simply waived in. And even when compensating factors were purportedly found to justify a 2 rather than a 3 grade, CW6 characterized many of the compensating factors as almost wishful thinking. 235. CW6 understood that Clayton was not supposed to assign too many failing

grades, to avoid upset[ting] the client (such as Goldman) and the lender that was selling the loans. Upsetting them could lead to business being taken to Claytons competitors, such as The Bohan Group. This concern was conveyed to Clayton by the clients that retained Clayton, the lenders who had originated the loans, and even by other Project Leads. 236. This point was made explicitly by one client, who told CW6 to get this fucking

guy out of here after a Clayton underwriter who was an expert on appraisals was kicking out too many loans based on problems with the appraisals. Representatives of the purchasers, in CW6s view, saw Clayton as irrelevant given that the larger objective was to securitize the loans. As such, they were not interested in the real quality of the loans being reviewed. One client representative said he did not give a flying fuck about DTI [debt to-income ratios] and other characteristics of the loans. Another client similarly told Clayton to get this shit done and get out of here, and dont make a big deal about any issues, despite that CW6 had found problems such as appraisals and missing documents. 237. CW6 typically reviewed 8 to 10 loans a day. Later, CW6 was pressured to

increase that to 21 loans per day. When CW6 protested that this was insufficient time to review

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that many loans, CW6 was told that his job was not to re-underwrite the file, but merely to just make sure it met the given guidelines. This made CW6 feel that the due diligence reviews were just going through the motions. CW6 admitted that Clayton did a bad job on stated incomes, as borrowers with average jobs were approved based on claims of making $300,000 to $400,000 per year. CW6 also admitted that many of the appraisals suffered from bad comps, that is, that they were based on comparisons to properties that were not, in fact, comparable. 238. Other employees have confirmed that the high rejection and waiver rates that have

now been confirmed to have been known by Goldman merely scratched the surface of the problems in the origination pipeline. For instance, according to Confidential Witness 7 (CW7), who worked at Clayton from 2003 to 2006 and whose job responsibilities included reviewing files to ensure compliance with guidelines provided by Claytons investment-bank clients, CW7 and others responsible for such reviews were not given much time to review the filesas little as half an hour for home equity loans and only 40 to 60 minutes for standard mortgages. Further limiting CW7s review (and thus making the high rejection rates all the more astounding) was the fact that CW7 was not authorized to conduct any independent outside confirmation, but only to mechanically check to see that the files contained, for example, a list of three other properties. According to CW7, Claytons analyses were further handicapped by the fact that employees were expected to know how to apply differing guidelines depending on the client. In addition, a loan file had to have four guideline failures before it was even considered for rejectionand even then, the loan was not immediately rejected, but rather simply elevated for further review. 239. Confidential Witness 8 (CW8) was a contract underwriter at Clayton from 2003

to 2004, and a transaction specialist there from 2005 to 2007. CW8s team would underwrite

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loans, including by visiting a clients offices to conduct the review. CW8 confirmed that a grade 3 file did not meet the guidelines and did not have compensating factors. CW8 also confirmed that reports were run daily that would provide notes on the reasons for the gradeand confirmed that these reports were usually sent to the client. According to CW8, clients sometimes would call to discuss low grades given to certain loans. If the client still wanted to buy the loan, the grade would sometimes be changed, sometimes based on the receipt of additional documents that supposedly cured the deficiency, but also sometimes merely by stipulation. 240. Similarly, Confidential Witness 9 (CW9) worked for Clayton as a contract

underwriter. Like CW7, CW9 claims that reviewers were only given 45 minutes to an hour to approve or reject a loan file. Also like CW7, CW9 recalled a lot of pressure to approve loans. According to CW9, Claytons team leaders had the ability to fix CW9s findings, and CW9 was told to keep their mouth shut rather than raise questions. 241. Confidential Witness 10 (CW10) was a Senior Project Lead at Clayton from

2004 to 2009, which meant that CW10 oversaw teams of underwriters assigned to review samples of loan pools being considered for purchase by Claytons clients. CW10 again confirmed that the clients received daily reports, as well as a final report summarizing the total results at the end of a project. CW10 even stated that certain clients could access the reports in real-time using Claytons software application. The reports reflected the results of CW10s teams review of the loans as against the underwriting guidelines they were given to applyan analysis that CW10 again confirms included giving a grade of 3 if the loan failed the guidelines (such as missing documentation) but did not contain any compensating factors. The reports also indicated why a loan was given the grade. The reviews CW10 performed sometimes would take place at the clients location, because some clients did not want the loan files to leave

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their premises. CW10 also confirms that Clayton was only asked to perform a review of a sample of the loansand often the client dictated what loans made up that sample. 242. According to CW10, at the end of a review a stipulation clearing process was

undertaken, where loans were re-reviewed to see if grade 3s could be made into grade 2s or grade 1s, such as through the provision of supplemental documentation in the loan file. In other situations, however, clients simply waived the requirements that necessitated the 3 grade. According to CW10, there was often no rhyme or reason offered by the client as to why the waivers were being provided. Rather, underwriters would simply make the grade change in the system. CW10 harbored doubts about the ability of the borrowers whose loans CW10s team were reviewing to repay the loans, but as long as the loans met the guidelines, it didnt matter. This included accepting clearly unreasonable income claims. 243. Confidential Witness 11 (CW11) worked as a contract underwriter at another

third party due diligence firm, the Bohan Group (Bohan) from 2004 until 2006. CW11 described a similar fast-paced review as discussed above with Clayton. Underwriters were expected to go through 10 to 12 loans per day, a pacing that meant that the reviewers didnt get into the meat of the loan. Indeed, the time constraints meant often the review was limited to data entry given the reviewers had to take everything at face value. CW11 said that Team Leads instructed reviewers not to look closely at appraisals, credit reports, asset or income documents, or at the reasonability of stated income or assets. 244. CW11 confirmed, as with Clayton, that Bohan graded loans on a three-point

scale, where grade 3 loans failed guidelines and did not show any compensating factors. According to CW11, Team Leads and Quality Control Underwriters could change the score without the underwriters knowledge. When CW11 took a discrepancy to a Team Leads

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attention, CW11 would sometimes be told not to worry because the loans were pretty much purchased already, and thus the reviewers just need[ed] to get the audit done. The most common problems CW11 could recall were FICO scores that were lower than guidelines required, DTI and LTV ratios higher than the guidelines allowed, suspect income calculations, and Truth-in-Lending Disclosure violations. The loans looked like garbage to CW11, but his job was to just quickly review, not to opine on whether they were garbage or not. 245. Confidential Witness 12 (CW12) worked as a Deal Manager at Bohan during

the 1990s and into 2006. In that role, CW12 communicated with clients to help determine how to configure the Bohan Risk Analysis Information Network (BRAIN) to reflect the underwriting parameters the client wanted tested, and would communicate with the underwriters on how to run those tests. The client often gave Bohan looser guidelines than used by the originators, and on top of that would instruct Bohan not to give a 3 grade unless the loan failed the guideline by a certain margin of error. 246. CW12 would email the days results to the client nightly. According to CW12,

clients would change grade 3 loans to grade 2 loans constantly. A hypothetical example that CW12 had no doubt happened, or something similar, was that a housekeeper might claim an income of $100,000 that Bohan would assign a grade 3 because of its unreasonableness, but the client would change it to a 2. A review with 40 percent grade 3 loans was not abnormal, according to CW12. According to CW12, the reason why a loan was given a grade was to be noted in the reports, so that the client could see why a given loan failed. 247. Melissa Toy and Irma Aninger, two contract risk analysis who reviewed loan files

for Bohan from 2004 to 2006, have stated that their supervisors overrode the majority of their challenges to shaky loans on behalf of Goldman and other firms:

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They couldnt recall specific examples involving loans bought by Goldman, but they said their supervisors cleared half-milliondollar loans to a gardener, a housekeeper and a hairdresser. Aninger, whose job was to review the work of other contract analysts, said that she objected to numerous applications for loans that required no income verification, her supervisor would typically tell her, You cant call him a liar ... You have to take (his) word for it. I dont even know why I was there, she said, because the stuff was gonna get pushed through anyway. Toy said she concluded that the reviews were mostly for appearances, because the Wall Street firms planned to repackage bogus loans swiftly and sell them as bonds, passing any future liabilities to the buyers. The investment banks and mortgage lenders each seemed to be playing hot potato, trying to pass the risks before they got burned, she said. There was nobody involved in this who didnt know what was going on, no matter what they say, she said. We all knew. Greg Gordon, Why did Goldman stop scrutinizing loans it bought?, McClatchy Washington Bureau, November 1, 2009. 248. In short, all of this testimony confirms that the third party due diligence firms

were under a tremendous amount of pressure to give passing grades to as many loans as possible, and were given very little information or time to grade the loans. This makes the high rejection rate seen in the deals Clayton handled for Goldman all the more damning, as the true defect rates were likely even higher. 249. This testimony further confirms that clients such as Goldman had direct access to

Clayton and Bohans data, and thus knew in near real-time how many loans were failing. The testimony confirms that the high waiver rates seen in Claytons Trending Reports evidence a conscious decision by Goldman to include into its securitizations loans that its due diligence had specifically identified as failing to meet the stated underwriting guidelines.

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B. 250.

Other Evidence Of Goldmans Willingness To Capitalize On Its Unique Knowledge At The Expense Of Investors That Goldman knew of the originators abandonment and of the true nature of the

Mortgage Loans it was securitizing is further evidenced by how Goldman handled its own investments. Goldman internally characterized its offerings as junk, monstrosities, dogs, lemons, crap, and other pejoratives. (FCIC Report at 235-36.) Nevertheless, it congratulated itself for successfully offloading such junk onto others. As the public learned in the FCICs Report, by January 2007, Daniel Sparks, the head of Goldmans mortgage department, extolled Goldmans success in reducing its subprime inventory, writing that the team had structured like mad and traveled the world, and worked their tails off to make some lemonade from some big old lemons. (Id. at 236.) 251. Even more damning than Goldmans decision to use securitization as a tool to

move declining loans off of Goldmans own books are the huge bets Goldman placed against the very mortgage-backed investments it was selling to investors. Goldman coupled those sales with an aggressive campaign to force lenders (the very same ones who originated loans in the Certificates) to repurchase defective loans which, due to the slowing securitization market, had been stuck on Goldmans own books. (1) 252. Goldman Began Shorting Its Own Offerings In 2006 And Into 2007

In the years leading up to and through 2006, Goldman was one of the most

prolificand profitableplayers in the subprime mortgage business, having securitized over $53 billion in mortgages from 2004 to 2006. (FCIC Report at 142.) In 2006 alone, Goldman underwrote 93 RMBS, garnering fees of $1 million to $8 million for each deal, and over $1 billion in total from all of its mortgage-related businesses. (SPSI Report at 398, 475; Reckless

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Endangerment at 339-40.) By 2006, Goldman held over $6 billion worth of subprime mortgagerelated assets on its books. (SPSI Report at 398.) 253. As the public learned in 2010, starting in 2005 and into 2006, Goldman began to

take an increasingly pessimistic view of the subprime mortgage market. Goldmans sophisticated and powerful propriety computer models analyzed trends in the performance of the hundreds of thousands of mortgages that collateralized its RMBS, and those models are Goldmans unique knowledge that those securities were not as safe as their offering materials and ratings represented to investors. In fact, Goldmans models showed that the RMBS had declined up to 70% from their face amounts. In his book, Money and Power: How Goldman Sachs Came to Rule the World, William D. Cohan explained: Goldmans RMBS model could analyze all the underlying mortgages and value the cash flows, as well as what would happen if interest rates changed, if prepayments were made, or if the mortgages were refinanced. The model could also spit out a valuation if defaults suddenly spiked upward . . . . [Goldmans] proprietary model was telling [Goldman] that it would not take much to wipe out the value of tranches of a mortgage-backed security that had previously looked very safe, at least in the estimation of the credit-rating agencies that had been paid (by Wall Street) to rate them investment grade. By tweaking the various assumptions based on events that seemed increasingly likely, [Goldmans] models were showing a marked decrease in the value of mortgage-related securities. Goldmans models said even if you dont believe housing prices are going to go down, even if we apply low-probability scenarios about it going negative . . . theres no way this stuff can be worth anywhere near one hundred [cents on the dollar] . . . . [Goldmans] models had them pegged anywhere between 30 cents and 70 cents . . . . (Money and Power, at 494-5). According to a former Goldman employee, these models as well as other information in Goldmans exclusive possession showed it the writing on the wall in this market as early as 2005, (Banks bundled bad Debt, Bet Against It and Won, New York Times, December 24, 2009) and into the the early summer of 2006. (SPSI Report at 398.) 254. To reduce its massive financial exposure to the subprime mortgage market,

Goldman began looking for ways to either short the market (i.e., make investments which would 85

rise in value and/or make payments to Goldman as the subprime mortgage market declined) and/or offload this risk onto other market participants. Its shorting strategies included the purchase of credit default swap protection on the very RBMS positions it sold into the market. Goldman bet that the RMBS would decline in value and/or default; if so, its swap counterparty would be required to pay Goldman. 255. Goldman entered into swaps worth hundreds of millions of dollars during this

time period, where it stood of the short side of the transaction, while its counterparty went long. Goldman did just that on a securitization it underwrote in the spring of 2006, Long Beach Mortgage Loan Trust 2006-A. By then, Long Beach was known to Goldman as one of the worst originators in the business, one which routinely flouted its underwriting guidelines. Goldman knew this based on its extensive business ties to Washington Mutual and Long Beach. They had collaborated on at least $14 billion in loan sales and securitizations. In February 2006, Long Beach had a $2 billion warehouse account with Goldman, the largest of Goldmans warehouse accounts at that time. Despite knowing what it did about Long Beachs underwriting practices and reckless origination, Goldman underwrote the offering which was backed by Long Beach mortgages. Goldman also took out a swap, betting those same securities would decline. 256. In less than a year after it was arranged, a Goldman analyst reported in February

2007 that all of Goldmans 2006 subprime second lien RMBS securities were deteriorating in performance but deals backed by Fremont and Long Beach have underperformed the most. (SPSI Report at 488.) 257. On May 17, 2007, a trader on the Mortgage Departments ABS Desk wrote to his

supervisor about additional losses in the Long Beach securitization: [B]ad news [The loss] wipes out the m6s [mezzanine tranche] and makes a wipeout of the m5 imminent. [C]osts us

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about 2.5 [million dollars]. [G]ood news ... [W]e own 10 [million dollars] protection at the m6 [W]e make $5 [million]. 258. As explained by the SPSI Report, In other words, Goldman lost $2.5 million

from the unsold Long Beach securities still on its books, but gained $5 million from the CDS contract shorting those same securities. Overall, Goldman profited from the decline of the same type of securities it had earlier sold to its customers. (Id. at 514.) That Goldman made money first by taking fees for underwriting the transaction, then again later by betting on its failure, is evidence it knew the Long Beach loans underlying the deal were among the junk it was so happy to offload onto investors. 259. This was not an isolated incident. According to the SPSI, Goldman did the same

thing with another securitization, GSAMP Trust 2007-FM2, which it created in March 2007, again backed by Fremont, one of the same lenders at issue here: Goldman marketed and sold the Fremont securities to its customers, while at the same time purchasing $15 million in CDS contracts referencing some of the Fremont securities it underwrote. Seven months later, by October 2007, the ratings downgrades had begun; by August 2009, every tranche in the GSAMP securitization had been downgraded to junk status. (SPSI Report at 516.) 260. One of the offerings at issue in this Complaint, GSAMP 2006-S3, was backed in

substantial part by Long Beach (and Fremont) mortgages. The Certificates for this Trust were sold to Allstate in April 2006, the same month that Goldman co-underwrote the disastrous Long Breach Mortgage Loan Trust 2006-A deal. As with the Long Beach offering, Goldman knew that the Long Beach mortgages in GSAMP 2006-3 were defective and did not conform to stated underwriting criteria. And like the Long Beach trust, it has performed dismally. 261. Through the rest of 2006 and 2007, Goldman continued to use its shorting

strategy as a way to reduce its own mortgage risk while continuing to create and sell mortgage87

related products to its clients. In 2006, Goldman made a massive $9 billion bet that the same type of assets it was pushing onto investors like Allstate would tank. (Id. at 419.) The $9 billion short bet was placed in 2006 by Goldmans mortgage department, the same department that oversaw the sale of the Certificates to Allstate. Goldmans net short position in 2007 rose as high as $13.9 billion. (Id. at 430.) Goldman sold RMBS and CDO securities to its clients without disclosing its own net short position against the subprime market or its purchase of CDS contracts to gain from the loss in value of some of the very securities it was selling to its client. (Id. at 9.) 262. On March 9, 2007, Goldmans Daniel Sparks wrote: Our current largest needs

are to execute and sell our new issuesCDOs and RMBSand to sell our other cash trading positions . . . . I cant overstate the importance to the business of selling these positions and new issues. A leading structured finance expert reportedly called Goldmans practice the most cynical use of credit information that I have ever seen, and compared it to buying fire insurance on someone elses house and then committing arson. (SPSI Hearing Ex. 4/27-76.) As the SPSI found, Goldman sold RMBS securities to customers at the same time it was shorting the securities and essentially betting that they would lose value. (Id. at 513.) (2) Goldmans Targeted Campaign To Put Back Defective Loans To Originators Demonstrates That It Knew The Targeted Originators Loans Violated Underwriting Guidelines

263.

Another tactic that Goldman used to reduce its subprime exposure in 2006was to

force originators from which it bought mortgages to buy them back. Goldmans repurchase rights arose from mortgage purchase agreements that it entered into with originators. These agreements typically required originators to warrant that their loans were underwritten according to standard guidelines and conformed to certain characteristics, including the accuracy of the mortgage loan schedule, the absence of fraud by the originator or mortgagor, and compliance 88

with federal and state laws. If a representation was breached, Goldman (as sponsor) could demand that the originator repurchase the defective loans as required by the mortgage purchase agreement. Goldman hired third party re-underwriting firms to assist in this put back process and to find defects in the loans which would then be used as a basis to require their repurchase. 264. Goldmans 2006 put back campaign was targeted at the originators whose loans

Goldman knew were most likely to yield underwriting breaches upon examination. Goldman had unique insight into the quality of the loans purchased from originators, arising from diligence on the originators themselves as well as their loans. Goldman knew that the originators who issued the most defective loans were Fremont, Long Beach, Aames, Mortgage Lenders Network, and NovaStar, among others. Goldman knew based on its many years of dealing with these originators that their loans were the worst on its books and thus the most likely to yield put back claims. 265. Internal Goldman emails prove the correctness of this prediction. For example,

the SPSIs 2011 report published a December 14, 2006 email from Goldmans Daniel Sparks which told colleagues, stay focused and aggressive on MLN [Mortgage Lenders Network] . . . . See SPSI Report at 405. On January 8, 2007, Daniel Sparks wrote to colleague, I just cant see how any originator in the industry is worth a premium. Im also a bit scared of [A]ccredited [Aames parent company] and [N]ew [C]entury, and Im not sure about taking a bunch of new exposures. (SPSI Report at 484 n. 2036 (emphasis added).) 266. On February 2, 2007, Sparks identified other prime targets of Goldmans

repurchase campaign. He said that his team is working on putting loans in the deals back to the originators (New Century, WAMU [Long Beachs parent], and Fremont all real

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counterparties) as there seem to be issues potentially including some fraud at origination, but resolution will take months and be contentions. (Id. at 484 (emphasis added).) 267. On March 7, 2007, Sparks continued emphasizing Goldmans priority in ridding

itself of loans issued by certain originators. He described Goldmans exposure as follows: As for the big 3 originators Accredited, New Century and Fremont, our real exposure is in the form of put-back claims. Basically, if we get nothing back we would lose around $60mm vs loans on our books (we have a reserve of $30mm) and the loans in the [CDO and RMBS] trusts could lose around $60mm (we probably suffer about 1/3 of this in ongoing exposures) . . . . (Id. at 485 (emphasis added).) 268. In March 2007, following an analysis of a pool of loans originated by Fremont,

Goldman concluded that about 50% of the 200 files reviewed look to be repurchase obligations. (Id. at 486.) Goldman made it a priority to re-underwrite and put back loans purchased from NovaStar, Accredited, Fremont and New Century. (Id. at 485.) 269. In total, between 2006 and 2007, Goldman made approximately $475 million in

repurchase claims to the originators and others for loans in its inventory. Goldman made about $34 million in repurchase requests to Long Beach and at least $21 million to Accredited. (Id. at n.2053.) All told, Goldman recovered approximately $82 million from this campaign (Id. at 483.) 270. The SPSI Report references numerous instances when Goldman sold securities to

investors that were backed by loans from the very originators it inundated with repurchase claims. In March 2007, Goldman arranged and sold an RMBS securitization called GSAMP Trust 2007-FM2, which securitized over $1 billion in Fremont subprime loans (id. at 515): In an internal February 2007 memorandum to its Mortgage Capital Committee, Goldman wrote that it had a significant relationship with Fremont, based upon past securitizations, whole loan purchases, and warehouse fees. In March 2007, at the same time it was sending millions of dollars in loan repurchase requests to

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Fremont, Goldman securitized over $1 billion in Fremont subprime loans in one of its warehouse accounts, originating GSAMP Trust 2007-FM2. (Id. at 515-16.) 271. GSAMP Trust 2007-FM2 has since been downgraded to junk status. Goldman,

however, purchased $15 million in CDS contracts referencing some of the Fremont securities it underwrote, betting against these very same securities. (Id. at 516.) 272. Goldmans actions in 2006 and 2007 present compelling evidence of Goldmans

complete abandonment of its customers interests in its drive to rid itself of declining and defective mortgage assets. 273. The Goldman Defendants had numerous overlapping employees, giving each

Defendant actual knowledge of the fraudulent scheme perpetrated on Allstate. For example, Daniel Sparks, head of Goldman Sachs Groups Inc.s Mortgage Department, was also the CEO and Director of GS Mortgage Securities Corporation. Thomas Gasvoda, the head of the Mortgage Departments Residential Whole Loan Trading Desk (which oversaw the purchase of mortgages and constructed and sold RMBS securitizations (id. at 477)), was a director of GS Mortgage Securities Corporation. Similarly, Michelle Gill, who worked on Goldmans put back campaign, was a vice president of GS Mortgage Securities Corporation and a managing director of Goldman Sachs Group, Inc. 274. Each of these executives played critical roles in establishing and implementing

Goldmans de-risking strategies in 2006 and 2007. For example, in February 2007, Gasvoda issued a directive or axe to the Goldman sales force to sell the remaining RMBS securities from Goldman-originated RMBS securitizations. On February 9, 2007, the sales force reported a substantial number of sales, and Mr. Gasvoda replied: Great job syndicate and sales, appreciate the focus. (Id. at 408.) Ms. Gill was responsible, in part, for Goldmans put back campaign

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in 2006, including the review of faulty Fremont loans. (Id. at 484.) Each worked under Sparks, who managed and coordinated Goldmans putback and other de-risking efforts. The Goldman Defendants overlapping personnel and intertwined business strategies meant that each provided material advice and assistance in the fraudulent scheme perpetrated on Allstate and each benefitted in financial and other ways from the sale of the Certificates to Allstate. C. 275. Numerous Government Investigations Have Confirmed Goldman Acted With Scienter Goldman is the subject of numerous criminal and regulatory probes related to its

mortgage underwriting practices. See Wall Street Probe Widens, The Wall Street Journal, May 12, 2010 (reporting on federal criminal and regulatory investigations of whether Goldman and others misled investors about their roles in mortgage-bond deals.) These investigations further confirm that Goldmans misrepresentations were not mere isolated, innocent mistakes, but the result of the companys reckless or intentional misconduct. 276. For example, Goldmans misconduct prompted the Attorney General of

Massachusetts to examine whether Goldman: failed to ascertain whether loans purchased from originators complied with the originators stated underwriting guidelines; failed to take sufficient steps to avoid placing problem loans into securitization pools; failed to correct inaccurate information in securitization trustee reports concerning repurchases of loans; and failed to make available to potential investors certain information concerning allegedly unfair or problem loans, including information obtained during loan due diligence and the pre-securitization process, as well as information concerning Goldman Sachs practices in making repurchase claims relating to loans in and out of securitizations. Goldman settled with the Commonwealth of Massachusetts, paying it $60 million.

277.

(FCIC Report at 226.) In announcing the settlement, the Massachusetts Attorney General stated

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that Goldman did not take sufficient steps to avoid placing problem loans in securitization pools. Goldman was also required to forgive all or portions of the balances on many loans it had bought and securitized, which resulted in tens of millions of dollars in additional expenses to Goldman. 278. The SPSI concluded that Goldman knowingly sold high risk, poor quality

mortgage products to clients around the world, saturating financial markets with complex, financially engineered instruments that magnified risk and losses when their underlying assets began to fail. (SPSI Report at 476 (emphasis added); see also id. at 513 (Goldman originated and sold RMBS securities that it knew had poor quality loans that were likely to incur abnormally high rates of default. (emphasis added).) 279. In May 2011, the New York Attorney General announced that it had opened an

investigation into Goldmans origination and securitization businesses. In June 2011, the Manhattan District Attorneys Office issued a subpoena to Goldman in connection with its investigation of Goldmans mortgage-backed securities. Both investigations are ongoing. D. 280. Further Evidence that Goldman Knew the Appraisals Were Inflated The appraised value of a mortgaged property is a key component in the stated

LTV and CLTV ratios. Goldman knew at the time the appraisals were false and baseless, and thus did not genuinely believe at the time the disclosed statistics were accurate. This is supported by the consistency of the wide disparities between reported and actual LTV and CLTV information for Allstates Certificates, discovered through the use of loan-level, contemporaneous information. It is also supported by evidence of the other systemic problems at issue here, testimony and investigations into the originators at issue here, confidential witness testimony detailed above, and other testimony that has been provided by industry insiders.

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281.

For instance, Richard Bitner, a former executive of a subprime lender for fifteen

years, testified in April 2010 before the FCIC that the appraisal process [was] highly susceptible to manipulation, and that the rise in property values was in part due to the subprime industrys acceptance of overvalued appraisals. Similarly, Patricia Lindsay, a former wholesale lender, testified before the FCIC that in her experience appraisers were often times pressured into coming in at value, i.e., at least the amount needed for the loan to be approved. The appraisers fearing their future business and their livelihoods would choose properties that would help support the needed value rather than finding the best comparables to come up with the most accurate value. And Jim Amorin, President of the Appraisal Institute, testified in April 2009 that in many cases, appraisers are ordered or severely pressured to doctor their reports to convey a particular, higher value for a property, or else never see work from those parties again . . . . [T]oo often state licensed and certified appraisers are forced into making a Hobsons Choice. 282. The FCICs January 2011 report recounts the similar testimony of Dennis J.

Black, an appraiser with twenty-four years of experience who held continuing education services across the country. He heard complaints from appraisers that they had been pressured to ignore missing kitchens, damaged walls, and inoperable mechanical systems. Black told the FCIC, The story I have heard most often is the client saying he could not use the appraisal because the value was [not] what they needed. The client would hire somebody else. IV. ALLSTATES DETRIMENTAL RELIANCE AND DAMAGES 283. Allstate invested in the Certificates as part of a broader plan to invest in a diverse

array of carefully underwritten, mortgage-backed securities. Allstate typically purchased senior classes of mortgage-backed securities (i.e., those rated AAA/Aaa or AA/Aa by the rating agencies Standard & Poors and Moodys Investors Service). Allstate purchased the Certificates to generate income and total return through safe investments. Allstate also purchased these 94

securities with the expectation that the investments could beand indeed some would be and werepurchased and sold on the secondary market. 284. In making the investments, Allstate relied upon Goldmans representations and

assurances regarding the quality of the mortgage collateral underlying the Certificates, including the quality of the underwriting processes related to the underlying Mortgage Loans. Allstate received, reviewed, and relied upon the Offering Materials, which described in detail the Mortgage Loans underlying each offering. Offering Materials containing the representations outlined above and in the Exhibits (or nearly identical, materially similar counterparts thereto) were obtained, reviewed, and relied upon before any purchase was made. 285. In purchasing the Certificates, Allstate justifiably relied on Goldmans false

representations and omissions of material fact detailed above, including the misstatements and omissions in the Offering Materials. These representations materially altered the total mix of information upon which Allstate made its purchasing decisions. 286. But for the misrepresentations and omissions in the Offering Materials, Allstate

would not have purchased or acquired the Certificates as it ultimately did, because those representations and omissions were material to its decision to acquire the Certificates, as described above. 287. The false and misleading statements of material facts and omissions of material

facts in the Offering Materials directly caused Allstate damage, because the Certificates were in fact far riskier than Goldman had described them to be. The loans underlying the Certificates experienced default and delinquency at very high rates due to Goldmans abandonment of the disclosed underwriting guidelines. The resulting downgrades to the Certificates ratings have

95

made them unmarketable at anywhere near the prices Allstate paid, thus confirming that Allstate paid far more for the Certificates than the value it actually received. 288. Allstate has incurred substantial losses in market value and lost principal and

interest payments, due to the poor quality of the collateral underlying the Certificates. The income and principal payments Allstate received have been lower than Allstate expected. Because of the declining collateral base, it is increasingly likely that Allstate will not obtain the full payments expected under the waterfall provisions of the securitizations. This is reflected in the far diminished market value for these securities, which, again, is a strong indicator that the true value of the Certificates was far less than what Allstate paid. 289. The disclosure of irregularities in Goldmans underwriting practices and increased

risk regarding future cash flow has further fed the substantial decline in market value of the Certificates. Allstate purchased the Certificates not only for their income stream, but also with an expectation of possibly reselling the Certificates on the secondary market. Allstate thus viewed market value as a critical aspect of the Certificates it purchased. Allstate incurred substantial losses on the Certificates due to a drastic decline in market value attributable to the misrepresentations which, when disclosed, revealed that the Mortgage Loans likely had a substantially higher risk profile than investors (including Allstate) were led to believe. Allstate has already incurred substantial losses on three of the deals it sold. 290. Allstates losses have been much greater than they would have been if the

Certificates and the loans underlying them were as Goldman described them to be. For example, the fact that the loans were not backed by owner-occupied properties at their claimed rate made them more prone to default. Owners who do not occupy their properties are more likely to

96

default on their loans, which made the Certificates poorer investments, accelerated the Certificates decline in value, and greatly worsened Allstates losses. 291. In fact, the loans underlying the Certificates have experienced default and

delinquency at extraordinarily high rates due to the abandonment of the disclosed underwriting guidelines. These rates of default are much higher than what a pool of loans that had the features Goldman described would have experienced in the same economic conditions. The income and principal payments that Allstate received have been less than Allstate expected under the waterfall provisions of the securitizations. Further, the higher default rates have eaten into the safety buffer such features as overcollateralization were supposed to provide, meaning the prospects for full receipt of the payments once expected have dropped significantly. 292. The high rates of default, the lower safety buffer left in its wake, and the

discovery of fundamental irregularities in Goldmans underwriting practices all signal increased risk in the Certificates. As a fundamental financial principle, the diminished prospect of continued cash flowsi.e., perceived and actual riskdictates that the Certificates were less valuable than they would have been but for the misrepresentations. Thus, Allstate is not seeking recovery for (or, in the alternative, to rescind based on) future potential losses, but recovery based on its past and current damages. 293. Even in the context of the real estate crisis, the Certificates would have held most,

if not all, their value had the securities been as represented by Goldman in its Offering Materials, because their mortgage pools would not have defaulted at nearly the same high rate. This decreased value is evidenced collectively by, but need not be measured solely by, among other things: (a) the high rates of default and delinquency of the Mortgage Loans; (b) the Certificates

97

plummeting ratings; (c) lower-than-expected past and current income streams from the Certificates; and (d) lower market value. 294. There are several potential ways of valuing a mortgage-backed security. One of

the potential ways that lower value can be measured, and part of the evidence supporting Allstates damages, can be found in secondary-market pricing. Though the market may have temporarily seized up during the financial crisis, it has since recovered and there was and is a functioning, liquid secondary market for mortgage-backed securities such as the Certificates here. Numerous brokers are active in, and have trading desks specifically dedicated to, the secondary market for RMBS, including without limitation Credit Suisse, Barclays, Bank of America, Citigroup, Deutsche Bank, Royal Bank of Scotland, J.P. Morgan, Nomura, and Morgan Stanley. 295. Indeed, Allstate has already sold its GSAMP 2006-S4, GSAMP 2006-S3, and

GSAA 2006-13 Certificates on the secondary market. 296. According to data provided to the FCIC, between May 2007 and November 2008

Goldman alone bought and sold $17 billion worth of RMBS cash securities, and $32 billion worth of credit default swaps linked to RMBS securities, representing a total of 7,000 trades. These figures demonstrate the liquidity in the secondary market for RMBS. 297. The Wall Street Journal recently reported that AIG Bonds are in Demand, and

found that the Federal Reserve Bank of New Yorks much anticipated auction of $1.5 billion in subprime bonds was deemed successful by industry participants . . . . Industry participants said dealers saw solid interest from investors. According to a CEO quoted by the article, The overwhelming majority of the list [of bonds] traded at more than the estimated price, indicating healthy demand by dealers and investors.

98

298.

The Wall Street Journal also recently quoted Federal Reserve Bank of Dallas

President Richard Fisher as saying that there is plenty of liquidity in the markets to drive growth. One of the signs he pointed to was the rejuvenation of the subprime markets. 299. Allstate viewed market value as a critical aspect of the Certificates it purchased.

Allstate has lost much of the market value in these securitiesmuch more than it would have lose if the Certificates had been backed by loans of the quality Goldman represented, which would have held up to the recent economic downturn much better than those loans Goldman actually included in these Certificates. These market losses are strong indicators that the value of the Certificates was in fact far less than what Allstate paid for them. 300. In short, defaults were much higher than they would have been if the Mortgage

Loans had been properly underwritten; this revealed that the true value of the Certificates was only pennies on the dollar of what Allstate paid. This is evidenced by, but not contingent entirely upon, the drop in market value of the securities. As loans which were properly underwritten would have withstood the same economic conditions much better than those Goldman offloaded onto Allstate here, and thus securities backed by loans with the features Goldman describes would currently have a much higher value than Allstates Certificates, Allstate was damaged by Goldmans wrongdoing. 301. Allstates damages here are separate and severable from any losses Allstate may

have sustained by the economic downturn, and such could be reliably measured through the discovery process. For instance, but without limitation, upon discovery of the full extent of Goldmans misrepresentations, expert testimony may compare the performance of the actual Certificates and/or loan pools here, with the performance of securities and/or loan pools that had the features described in the Offering Materials, as one potential measure of Allstates damages.

99

However, it is well beyond Allstates pleading burden to perform such analysis here, and in any event the full extent of Goldmans misrepresentations is unknown as Allstate does not have access to the loan files. FIRST CAUSE OF ACTION (Common-law Fraud against Goldman, Sachs & Company, Goldman Sachs Mortgage Company, and GS Mortgage Securities Corporation ) 302. 303. Allstate realleges each allegation above as if fully set forth herein. The material representations set forth above were fraudulent, and Goldmans

representations falsely and misleadingly misrepresented and omitted material statements of fact. The representations at issue are identified above and are further identified in Exhibits C through G. 304. Goldman knew its representations and omissions were false and/or misleading at

the time they were made, or made such representations and omissions without knowledge of their truth or falsity. 305. Each of the Goldman Defendants made the misleading statements for the purpose

of inducing Allstate to purchase the Certificates. 306. omissions. 307. Had Allstate known the true facts regarding Goldmans underwriting practices Allstate justifiably relied on Goldmans false representations and misleading

and quality of the loans making up the securitizations, it would not have purchased the Certificates as it ultimately did. 308. As a result of the foregoing, Allstate has suffered damages according to proof. In

the alternative, Allstate hereby demands rescission and makes any necessary tender of Certificates.

100

SECOND CAUSE OF ACTION (Fraudulent Inducement against Goldman, Sachs & Company, Goldman Sachs Mortgage Company, and GS Mortgage Securities Corporation) 309. 310. Allstate realleges each allegation above as if fully set forth herein. Allstate was fraudulently induced to purchase the Certificates by Goldmans

misrepresentations and omissions of material facts. The materially untrue representations at issue are identified above and are further identified in Exhibits C through G. 311. Goldman knew its representations and omissions were false and/or misleading at

the time they were made. Each made the misleading statements with an intent to induce Allstate to purchase the Certificates. 312. Allstate justifiably relied on Goldmans false representations and misleading

omissions in purchasing the Certificates. 313. Had Allstate known the true facts, it would not have purchased the Certificates as

it ultimately did. 314. As a result of the foregoing, Allstate has the right to rescind the fraudulently

induced Certificate purchases and to require Goldman to repurchase the Certificates at their original cost, plus interest. Allstate hereby seeks rescission and makes any necessary tender of its Certificates. In the alternative, Allstate seeks damages according to proof. THIRD CAUSE OF ACTION (Negligent Misrepresentation against Goldman, Sachs & Company, Goldman Sachs Mortgage Company, and GS Mortgage Securities Corporation) 315. 316. Allstate realleges each allegation above as if fully set forth herein. Goldman acquired all of the underlying Mortgage Loans and underwrote and

sponsored the securitizations at issue. Based on due diligence it conducted on the loan pools and the originators, it had unique and special knowledge about underwriting defects in the loans in the offerings. Goldman was uniquely situated to evaluate the economics of each Securitization. 101

317.

Indeed, Goldman held itself out as having a superior market position and special

expertise with respect to the Certificates through its extensive experience in the RMBS space. As the sponsor, underwriter and depositor of the Certificates, Goldman was uniquely situated to explain the details, attributes, and conditions of each security. Goldman made the misrepresentations described above to induce Allstate to purchase the Certificates. 318. Allstate did not possess the loan files for the Mortgage Loans underlying its

Certificates and thus it could not conduct a loan-level analysis of the underwriting quality or servicing practices for the Mortgage Loans. As Goldman knew, Allstate relied on Goldmans unique and special knowledge regarding the quality of the underlying Mortgage Loans and their underwriting when determining whether to invest in the Certificates at issue in this action. Based on its expertise, superior knowledge, and relationship with Allstate, Goldman knew Allstate relied upon the accuracy of the representations in the Offering Materials. It also knew that the facts regarding its compliance with its underwriting standards were exclusively within its knowledge. Goldman owed a duty to Allstate to disclose material facts about known underwriting defects in the collateral pools of the Certificates. 319. Goldman knew that over the course of their long-term relationship, Allstate had

come to trust and have confidence in Goldman. Goldman has had a long-standing, strategic relationship with Allstate since Allstates initial public offering in the 1990s. Multiple investment, investment banking and strategic advice relationships have existed and continue to exist between GS and Allstate. This longstanding relationship of confidence and trust gave Goldman unique insight into Allstates financial condition, investment portfolio and strategies, which Goldman exploited in selling the Certificates to Allstate. This longstanding relationship,

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coupled with Goldmans unique and special knowledge about the underlying loans, created a special relationship of trust, confidence, and dependence between Goldman and Allstate. 320. Allstate reasonably relied on Goldmans misrepresentations which Goldman

undertook no attempt to correct. Without these material misrepresentations, Allstate would not have bought the Certificates. 321. The misrepresentations at issue are identified above and are further identified in

Exhibits C through G. At the time it made these misrepresentations, Goldman knew, or at a minimum was negligent in not knowing, that these statements were false, misleading, and incorrect. Such information was known to Goldman but not known to Allstate, and Goldman knew that Allstate was acting in reliance on mistaken information. 322. Goldman was in the business of providing information for use by others,

including Allstate. Specifically but without limitation, it was in the business of providing information by way of the Offering Materials so that investors could rely on them in deciding whether to invest in the securities being offered. This information was primarily for the use of a small class of large, institutional investors. 323. Goldmans material misrepresentations and omissions set forth above were made

without any reasonable ground for believing that the representations were true. 324. As a result of the foregoing, Allstate has suffered damages according to proof. FOURTH CAUSE OF ACTION (Aiding and Abetting against All Defendants) 325. 326. Allstate realleges each allegation above as if fully set forth herein. This is a claim for aiding and abetting fraud brought against all Goldman

Defendants arising from the intentional and substantial assistance each rendered to the others to advance the fraud on Allstate.

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327.

Defendant Goldman Sachs Group, Inc. is one of the worlds largest global

investment banking, securities trading and investment management firms. It is the ultimate parent of each of the other Goldman Defendants. All Defendants had actual knowledge of, and substantially assisted in, the fraudulent scheme to securitize each of the trusts at issue and market and sell the Certificates to investors, including Allstate, without disclosing the truth about those investments. Goldman Sachs Group, Inc., through affiliation with, or ownership of, each of the other Goldman Defendants, controls their business activities. It is a limited partner in Goldman Sachs Mortgage Company, the sponsor for each of the Trusts, and controls the general partner of Goldman Sachs Mortgage Company. Through Goldman Sachs Mortgage Company, Goldman Sachs Group, Inc. created and controls GS Mortgage Securities Corporation, the depositor for the Trusts. 328. All of the Defendants, through their employees and representatives, substantially

assisted in, among other things: (a) the extension of warehouse loans to originators; (b) acquiring the underlying mortgage loans from the originators; (c) packaging up those loans into pools which were deposited into the Trusts, (d) waiving into the collateral pools of the Trusts loans previously rejected by Clayton and Bohan, despite the lack of compensating factors; (e) creating and structuring the Trusts whose Certificates would be sold to investors including Allstate and (f) preparing the Offering Materials which would be used to market the Certificates to investors like Allstate. 329. Indeed, all of the de-risking strategies described above (including the shorting and

repurchasing strategies which Goldman pursued in 2006 through 2007 in order to reduce its subprime exposure) were conceived, in part, by senior executives of Defendant Goldman Sachs Group, Inc., and then implemented by each of the Defendants in their roles as underwriter,

104

sponsor and depositor of the Certificates. Defendants employed those strategies to create, market, and sell the Certificates to investors, including Allstate. The de-risking strategies described above were executed, by among others, Goldman employees who wore multiple hats among the Goldman entities. This gave each of the Goldman Defendants direct knowledge of the fraudulent sale of the Certificates. Through overlapping personnel, strategies and intertwined business operations, and the fluid transfer of information among the Defendants, each of the Goldman Defendants knew of the fraud perpetrated on Allstate. Each Defendant acted in concert to defraud Allstate. 330. Defendants could not have perpetrated their fraud without the substantial

assistance of each other defendant, and they all provided financial, strategic, and marketing assistance for their scheme. Defendants are highly intertwined and interdependent businesses and each benefited from the success of the scheme. Through the fraudulent sale of the Certificates to Allstate, the Goldman Defendants were able to materially improve their financial condition by reducing their exposure to declining subprime-related assets and garnering thousands of dollars in fees from the structuring and sale of the Certificates. 331. As a direct, proximate, and foreseeable result of the Goldman Defendants

conduct, Allstate has suffered and will continue to suffer harm. PRAYER FOR RELIEF WHEREFORE Allstate prays for relief as follows: An award in favor of Allstate against Goldman, jointly and severally, for all damages sustained as a result of Goldmans wrongdoing, in an amount to be proven at trial, but including at a minimum: a. Allstates monetary losses, including loss of market value and loss of principal

and interest payments; 105

b.

Rescission and recovery of the consideration paid for the Certificates, with

interest thereon; c. d. e. Attorneys fees and costs; Prejudgment interest at the maximum legal rate; and Such other and further relief as the Court may deem just and proper. JURY TRIAL DEMANDED Allstate hereby demands a trial by jury on all issues triable by jury.

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FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-1

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit A: Overview of Allstate's Goldman Sachs RMBS Investments

Seller/ Depositor Sponsor GS Mortage Goldman Sachs Securities Corp. Mortgage Company GS Mortage Goldman Sachs Securities Corp. Mortgage Company

Offering and Class GSAMP 2006-HE7 M2

Full Name of Offering Issuing Entity Mortgage Pass-Through GSAMP Trust 2006-HE7 Certificates, Series 2006-HE7

Underwriter Goldman, Sachs & Co.

Servicer(s) Litton Loan Servicing LP; Avelo Mortgage, L.L.C. Litton Loan Servicing LP; Avelo Mortgage, L.L.C.; Select Portfolio Servicing, Inc. IndyMac Bank, F.S.B.; American Home Mortgage Servicing, Inc.; Ocwen Loan Servicing, LLC Ocwen Loan Servicing, LLC Wells Fargo Bank, National Association

GSAMP 2006-HE5 M2

Mortgage Pass-Through GSAMP Trust 2006-HE5 Certificates, Series 2006-HE5

Goldman, Sachs & Co.

GSAMP 2006-S4 A1

Mortgage Pass-Through Certificates, Series 2006-S4

GSAMP Trust 2006-S4

GS Mortage Goldman Sachs Securities Corp. Mortgage Company

Goldman, Sachs & Co.

GSAMP 2006-S3 A1

Mortgage Pass-Through Certificates, Series 2006-S3 Asset-Backed Certificates, Series 2006-13

GSAMP Trust 2006-S3

GSAA 2006-13 AF2

GSAA Home Equity Trust 2006-13

GS Mortage Goldman Sachs Securities Corp. Mortgage Company GS Mortage Goldman Sachs Securities Corp. Mortgage Company

Goldman, Sachs & Co. Goldman, Sachs & Co.

A-1

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-2

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit B: Purchase Information for Allstate's Goldman Sachs RMBS Investments

Offering and Class GSAMP 2006-HE7 M2 GSAMP 2006-HE5 M2 GSAMP 2006-S4 A1 GSAA 2006-S3 A1 GSAA 2006-13 AF2 Purchaser Allstate Life Insurance Co. Allstate Life Insurance Co. Allstate Life Insurance Co. Allstate Insurance Co. Allstate Insurance Co. Purchase Date 2007 2007 2006 2006 2006 Purchase Price 11,850,937.20 19,789,062.00 33,000,000.00 24,999,975.00 34,050,000.00

$ $ $ $ $

B-1

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-3

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit C: Misrepresentations in the Offering Documents for GSAMP 2006-HE7 1. Collateral type: conventional, subprime, adjustable- and fixed-rate, first and second-lien residential mortgage loans with original terms to maturity from their first scheduled payment due date of not more than 40 years. 2. Initial number of mortgage loans: 4,899. 3. Untrue and misleading statements about underwriting guidelines in the GSAMP 2006-HE7 Offering Documents: a. Section entitled, The Mortgage Loan Pool (GSAMP 2006-HE7 Pro. Supp. pp. S-36 to S-44), and representations therein, including the representation that [t]he mortgage loans were originated or acquired generally in accordance with the underwriting guidelines of the original loan sellers, or in the sponsors underwriting guidelines in the case of the conduit mortgage loans. GSAMP 2006-HE7 Pro. Supp. p. S-36. b. Section entitled SouthStar Underwriting Guidelines (GSAMP 2006-HE7 Pro. Supp. pp. S-45 to S-47), and representations therein, including the representation that [t]he following is a summary of the underwriting guidelines believed by the depositor to have been applied . . . . SouthStars guidelines are intended to evaluate the borrowers ability to repay the mortgage loan, evaluate the borrowers credit and evaluate the value and adequacy of the collateral. SouthStar does not approve mortgage loans based solely on the value of the collateral. . . . Underwriters are required to approve mortgage loans based on the applicable guidelines. Underwriters may on a case by case basis, based on compensating factors, approve mortgage loans that do not strictly comply with the

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GSAMP 2006-HE7

guidelines. In all instances, the borrowers must show the ability to repay the mortgage loan, have acceptable credit, and acceptable collateral. GSAMP 2006HE7 Pro. Supp. p. S-45. c. Section entitled Aames Underwriting Guidelines (GSAMP 2006-HE7 Pro. Supp. pp. S-47 to S-51), and representations therein, including the representation that the Aames mortgage loans were underwritten generally in accordance with the underwriting criteria described below. GSAMP 2006-HE7 Pro. Supp. p. S47. The Prospectus Supplement represented that Aames Fundings underwriting guidelines were designed to assess the borrowers creditworthiness and the adequacy of the real property as collateral for the loan. The borrowers creditworthiness was assessed by examination of a number of factors, including calculation of debt-to-income ratios, which is the sum of the borrowers monthly debt payments divided by the borrowers monthly income before taxes and other payroll deductions, an examination of the borrowers credit history and credit score through standard credit reporting bureaus, and by evaluating the borrowers payment history with respect to existing mortgages, if any, on the property. GSAMP 2006-HE7 Pro. Supp. p. S-48. Moreover the Prospectus Supplement represented that Aames Fundings underwriting policy was to analyze the overall situation of the borrower and to take into account compensating factors that might be used to offset certain areas of weakness . . . . A critical function of Aames Fundings underwriting process was to identify the level of credit risk associated with each applicant for a mortgage loan . . . . Aames Funding was required to

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approve all loan applications in accordance with its underwriting criteria. GSAMP 2006-HE7 Pro. Supp. pp. S-48 to S-49. d. Goldman Sachss statements about underwriting guidelines were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the loans were originated and acquired without regard to their quality or the stated underwriting guidelines. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 4. Untrue and misleading statements about owner occupancy in the GSAMP 2006HE7 Offering Documents: a. The Offering Documents represented that 4,503 loans (91.9%) were for owneroccupied properties. GSAMP 2006-HE7 Pro. Supp. p. A-4. b. Goldman Sachs statements about owner occupancy were untrue and misleading for the reasons set forth in the Complaint. A material amount of the loans were not in fact owner-occupied, and Goldman Sachs omitted that the given statistics were (due to the abandonment of the disclosed underwriting standards) baseless. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. c. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that Goldman Sachs drastically overstated the percentage of owner-occupied properties secured by Mortgage Loans in the collateral pool. i. Of the 1,471 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the owner of the

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property instructed tax authorities to send property tax bills to him or her at a different address, or listed a different address as the one for the property owners property tax exemption: 71. ii. Of the 1,471 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which creditors reported a different property address as the customers mailing address six months after the origination of the securitized loan: 124. iii. Of the 1,471 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the borrower owned other properties during the same time period of ownership of the securitized property: 73. iv. Of the 1,471 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower did not list the securitized property as the owners primary residence: 186. v. Of the 1,471 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower had liens that did not list the securitized property as the owners primary residence: 193. vi. In sum, of the 1,471 Mortgage Loans tested that were allegedly secured by owner-occupied properties, the non-duplicative number of loans that appear not to be owner-occupied based on their failure of at least two of

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Allstates analytical tests: 155, representing 10.5% of the Mortgage Loans tested that were allegedly secured by owner-occupied properties. 5. Untrue and misleading statements about LTV and CLTV ratios in the GSAMP 2006-HE7 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including details regarding the LTV characteristics of the loans and the mortgage pool as a whole. GSAMP 2006-HE7 Pro. Supp. p A-3. Among other statistics, the charts made the following untrue and misleading statements about the 4,899 initial mortgage loans in the collateral pool: i. The weighted average initial LTV ratio was 76.97%. ii. No loan had an LTV ratio greater than 100%. iii. Only 561 loans (11.45% of the total initial mortgage loans) had an LTV ratio greater than 90%. iv. Only 1,793 loans (36.60% of the total initial mortgage loans) had an LTV ratio greater than 80%. v. The weighted average initial CLTV ratio was 79.43%. vi. No loan had a CLTV ratio greater than 100%. vii. 1,026 loans (20.94% of the total initial mortgage loans) had a CLTV ratio greater than 90%. viii. 2,298 loans (46.91% of the total initial mortgage loans) had a CLTV ratio greater than 80%.

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b. An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the related mortgage loan. All appraisals must be on forms acceptable to Fannie Mae and/or Freddie Mac and conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Appraisers may be staff licensed appraisers employed by the originator or independent licensed appraisers selected in accordance with established appraisal procedure guidelines acceptable to the originator. Generally, the appraisal procedure guidelines require the appraiser or an agent on its behalf to inspect the property personally and verify whether the property is in good condition and that, if new, construction has been substantially completed. The appraisal generally will be based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. Prospectus pp. 3233. c. Representations about SouthStars appraisal policy procedures, including representations that SouthStar realizes the soundness of a portfolio depends to a significant extent on the quality and accuracy of the real estate appraisal. GSAMP 2006-HE7 Pro. Supp. p. S-47.

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d. Representations about Aames appraisal policy and procedures, including representations that an assessment of the adequacy of the real property as collateral for the loan is primarily based upon an appraisal of the property and a calculation of the loan-to-value ratios of the loan applied for and of all mortgages existing on the property, including the loan applied for the combined loan-tovalue ratio, to the appraised value of the property at the time of origination. GSAMP 2006-HE7 Pro. Supp. p. S-49. e. Goldman Sachs statements about LTVs and CLTVs were untrue and misleading for the reasons set forth in the Complaint. Goldman Sachs knew that baselessly inflated appraisals were being used, and additional liens ignored, in order to get more loans approved. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. This is further evidenced by testimony regarding the rampant conflicts of interest within the appraisal process at the time the Certificates were issued. f. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that the ratios were much higher than represented. In fact: i. The weighted average initial LTV ratio was 89.07%. ii. 24.64% of the loans tested had an LTV ratio greater than 100%. iii. 44.68% of the loans tested had an LTV ratio greater than 90%. iv. 68.20% of the loans tested had an LTV greater than 80%. v. The weighted average initial CLTV ratio was 96.01%; vi. 44.68% of the loans tested had a CLTV ratio greater than 100%; vii. 65.54% of the loans tested had a CLTV ratio greater than 90%;

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viii. 79.55% of the loans tested had a CLTV greater than 80%. g. Allstates loan-level analysis has further determined that: i. 43.6% of the loans had an actual LTV ratio that was at least 10% greater than the LTV ratio those loans purportedly had. ii. 11.5% of the loans had an actual LTV ratio that was at least 25% greater than the LTV ratio those loans purportedly had. iii. 49.9% of the loans had an actual CLTV ratio that was at least 10% greater than the CLTV ratio those loans purportedly had. iv. 14.8% of the loans had an actual CLTV ratio that was at least 25% greater than the CLTV ratio those loans purportedly had. 6. Untrue and misleading statements about the sufficiency of the borrowers income in the GSAMP 2006-HE7 Offering Documents: a. The non-zero weighted average debt to income ratio at origination for the mortgage loans in the collateral pool was purportedly 41.78%. GSAMP 2006HE7 Pro. Supp. p. S-13. b. Representation that [d]ebt to income ratio not to exceed 50% on Full Documentation and Stated Income mortgage loans. Debt to income is not applicable for No Documentation (55% DTI acceptable with compensating factors, excluding WV, SSF Combo Loans and loans with prior bankruptcy or CCCS). GSAMP 2006-HE7 Pro. Supp. p. S-46. c. Aames Fundings Super Aim guidelines generally permitted a maximum debt-toincome ratio (DTI) of 50%. For full documentation or limited documentation loans with LTVs of 85% or less, the maximum DTI is 55%, and for loans with

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LTVs of greater than 95%, the maximum DTI is 45%. Interest-only loans, limited to the A+, A and A- credit grades, had a generally higher minimum credit score of 580, and a maximum DTI of 50%. GSAMP 2006-HE7 Pro. Supp. p. S50. d. Goldman Sachs statements about the borrowers income were untrue and misleading for the reasons set forth in the Complaint. As the underwriting procedures were systematically abandoned, representations regarding the sufficiency of the borrowers income were baseless. Borrowers, often at the lenders coaching, routinely inflated their incomes. These representations falsity is confirmed by the sudden and rising default and delinquency rates for the Mortgage Loans, which shows that borrowers were put into loans they could not afford. 7. Untrue and misleading statements about credit ratings in the GSAMP 2006-HE7 Offering Documents: a. In order to be issued, the Offered Certificates must be assigned ratings not lower than the following by Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. (S&P) and Moodys Investors Service, Inc. (Moodys): [chart] . . . . A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled to by the Final Scheduled Distribution Date. GSAMP 2006-HE7 Pro. Supp. p. S-132. b. It is a condition to the issuance of the securities of each series offered by this prospectus and by the related prospectus supplement that the nationally

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GSAMP 2006-HE7

recognized statistical rating agency or agencies specified in the prospectus supplement shall have rated the securities in one of the four highest rating categories. GSAMP 2006-HE7 Prospectus p. 127. c. The initial and current ratings for the Certificates Allstate purchased are set forth in the Complaint. d. Goldman Sachs statements about credit ratings were untrue and misleading for the reasons set forth in the Complaint. Unknown to Allstate, the rating agencies were fed baseless and false statistics regarding the loans, as evidenced by a statistical analysis of the Mortgage Loans at issue here, rendering the ratings relied upon meaningless. 8. Untrue and misleading statements regarding case-by-case underwriting exceptions in the GSAMP 2006-HE7 Offering Documents: a. Pursuant to SouthStars underwriting guidelines: Underwriters may on a case by case basis, based on compensating factors, approve mortgage loans that do not strictly comply with the guidelines. GSAMP 2006-HE7 Pro. Supp. p. S-45. b. Pursuant to Aames Fundings underwriting guidelines: If an individual loan application did not meet Aames Fundings formal written underwriting guidelines, its underwriters could make underwriting exceptions up to certain limits within its formal exception policies and approval authorities. GSAMP 2006-HE7 Pro. Supp. p. S-48. c. Pursuant to the Goldman Sachs Mortgage Conduit Program: In certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant [Goldman Sachs Mortgage Company] to make

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GSAMP 2006-HE7

certain exceptions to these [underwriting] guidelines. In such instances [Goldman Sachs Mortgage Company] would purchase a mortgage loan that did not completely conform to the guidelines . . . . GSAMP 2006-HE7 Prospectus p. 30. d. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the representation that exceptions to the underwriting guidelines were made on a case-by-case basis was at best misleading and at worst false. The exceptions became the rule, and the guidelines were systematically ignored. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 9. Untrue and misleading statements regarding credit enhancements in the GSAMP 2006-HE7 Offering Documents: a. Credit EnhancementSubordination of the subordinate certificates to the senior certificates as described in this prospectus supplement under Description of the CertificatesPriority of Distributions and Allocation of Losses. Excess interest and overcollateralization as described in this prospectus supplement under Description of the CertificatesOvercollateralization Provisions. GSAMP 2006-HE7 Pro. Supp. p. S-1. b. Credit Enhancement. The credit enhancement provided for the benefit of the holders of the certificates consists solely of: [a] an initial overcollateralization amount of approximately 2.10% of the aggregate scheduled principal balance of the mortgage loans as of the cut-off date, [b] the use of excess interest, after taking into account certain payments received or paid by the trust pursuant to the

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GSAMP 2006-HE7

interest rate swap agreement described below, to cover losses on the mortgage loans and as a distribution of principal to restore overcollateralization to a specified level as a result of losses, [c] the subordination of distributions on the more subordinate classes of certificates to the required distributions on the more senior classes of certificates, and [d] the allocation of losses on the mortgage loans to the most subordinate classes of certificates then outstanding. GSAMP 2006-HE7 Pro. Supp. pp. S-11 to S-12; see also GSAMP 2006-HE7 Prospectus pp. 45-54. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by, among other things, a loan-level analysis of the Mortgage Loans at issue here, the collateral was significantly riskier than presented, rendering representations regarding the efficacy or sufficiency of any structural credit enhancements that depended on or were derived from the quality of those loans false and misleading.

C-12

GSAMP 2006-HE7

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-4

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit D: Misrepresentations in the Offering Documents for GSAMP 2006-HE5 1. Collateral type: conventional, subprime, adjustable- and fixed-rate, first and second-lien residential mortgage loans with original terms to maturity from their first scheduled payment due date of not more than 40 years. 2. Initial number of mortgage loans: 6,692 (Group I: 1,992; Group II: 4,700). 3. Untrue and misleading statements about underwriting guidelines in the GSAMP 2006-HE5 Offering Documents: a. Section entitled, The Mortgage Loan Pool, at pages S-37 to S-41, and representations therein, including the representation that [t]he mortgage loans were originated or acquired generally in accordance with the underwriting guidelines of the original loan sellers, or in the sponsors underwriting guidelines in the case of the conduit mortgage loans. Pro. Supp. p. S-37. b. Section entitled, Aames Underwriting Guidelines at pages S-43 to S-48 of the Prospectus Supplement, and representations therein, including the representation that the Aames mortgage loans were underwritten generally in accordance with the underwriting criteria described below. Pro. Supp. at S-43. Aames Fundings underwriting guidelines are designed to assess the borrowers creditworthiness and the adequacy of the real property as collateral for the loan. Pro. Supp. p. S-44. The borrowers creditworthiness was assessed by examination of a number of factors, including calculation of debt-to-income ratios, which is the sum of the borrowers monthly debt payments divided by the borrowers monthly income before taxes and other payroll deductions, an examination of the borrowers credit history and credit score through standard

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GSAMP 2006-HE5

credit reporting bureaus, and by evaluating the borrowers payment history with respect to existing mortgages, if any, on the property. Moreover, the Prospectus Supplement represented that Aames Fundings underwriting policy was to analyze the overall situation of the borrower and to take into account compensating factors that might be used to offset certain areas of weakness . . . . A critical function of Aames Fundings underwriting process was to identify the level of credit risk associated with each applicant for a mortgage loan . . . . Aames Funding was required to approve all loan applications in accordance with its underwriting criteria. Pro. Supp. at S-44, 45; see also the materially identical representations set forth in the Prospectus Supplement for GSAMP 2006-HE7. c. Goldman Sachss statements about underwriting guidelines were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the loans were originated and acquired without regard to their quality or the stated underwriting guidelines. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and by other facts referenced in the Complaint. 4. Untrue and misleading statements about owner occupancy in the GSAMP 2006HE5 Offering Documents: a. The Offering Documents represented that 1,882 of the Group I loans (94.5%) were for owner-occupied properties. Pro. Supp. p. A-16. b. The Offering Documents represented that 4,367 of the Group II loans (92.9%) were for owner-occupied properties. Pro. Supp. p. A-23.

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GSAMP 2006-HE5

c. Goldman Sachs statements about owner occupancy were untrue and misleading for the reasons set forth in the Complaint. A material amount of the loans were not in fact owner-occupied, and Goldman Sachs omitted that the given statistics were (due to the abandonment of the disclosed underwriting standards) baseless. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. d. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that Goldman Sachs drastically overstated the percentage of owner-occupied properties secured by Mortgage Loans in the collateral pool. i. Of the 1,514 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the owner of the property instructed tax authorities to send property tax bills to him or her at a different address, or listed a different address as the one for the property owners property tax exemption: 90. ii. Of the 1,514 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which creditors reported a different property address as the customers mailing address six months after the origination of the securitized loan: 102. iii. Of the 1,514 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the borrower owned other properties during the same time period of ownership of the securitized property: 62.

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GSAMP 2006-HE5

iv. Of the 1,514 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower did not list the securitized property as the owners primary residence: 176. v. Of the 1,514 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower had liens that did not list the securitized property as the owners primary residence: 208. vi. In sum, of the 1,514 Mortgage Loans tested that were allegedly secured by owner-occupied properties, the non-duplicative number of loans that appear not to be owner-occupied, based on their failure of at least two of Allstates analytical tests: 166, representing 11.0% of the Mortgage Loans tested that were allegedly secured by owner-occupied properties. 5. Untrue and misleading statements about LTV and CLTV ratios in the GSAMP 2006-HE5 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates. Pro. Supp. pp. A-13, A-15, A-20, A-22. Among other statistics, the charts made the following untrue and misleading statements about the 1,992 initial mortgage loans in the Loan Group 1 collateral pool: i. The weighted average initial LTV ratio was 76.42%. ii. No loan had an LTV ratio greater than 100%.

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GSAMP 2006-HE5

iii. Only 175 loans (8.79% of the Group I initial mortgage loans) had an LTV ratio greater than 90%. iv. Only 537 loans (26.96% of the Group I initial mortgage loans) had an LTV ratio greater than 80%. v. The weighted average initial CLTV ratio was 77.53%; vi. No loan had an initial CLTV ratio of more than 100%; vii. 284 loans (14.26% of the Group I mortgage loans) had a CLTV ratio greater than 90%; viii. 654 loans (32.83% of the Group I initial mortgage loans) had a CLTV ratio greater than 80%. b. Among other statistics, the chart on page A-22 made the following untrue and misleading statements about the 4,700 initial mortgage loans in the Loan Group II collateral pool: i. The weighted average initial LTV ratio was 77.33%. ii. No loan had an LTV ratio greater than 100%. iii. Only 322 loans (6.85% of the Group II initial mortgage loans) had an LTV ratio greater than 90%. iv. Only 1,164 loans (24.77% of the Group II initial mortgage loans) had an LTV ratio greater than 80%. v. The weighted average initial CLTV ratio was 82.05%. vi. No loan had an initial CLTV ratio of more than 100%. vii. Only 1,213 loans (25.81% of the Group II loans) had a CLTV ratio greater than 90%.

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GSAMP 2006-HE5

viii. Only 2,091 loans (44.49% of the Group II initial mortgage loans) had a CLTV ratio greater than 80%. c. An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the related mortgage loan. All appraisals must be on forms acceptable to Fannie Mae and/or Freddie Mac and conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Appraisers may be staff licensed appraisers employed by the originator or independent licensed appraisers selected in accordance with established appraisal procedure guidelines acceptable to the originator. Generally, the appraisal procedure guidelines require the appraiser or an agent on its behalf to inspect the property personally and verify whether the property is in good condition and that, if new, construction has been substantially completed. The appraisal generally will be based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. Prospectus pp. 3233. d. Representations about Aames appraisal policy and procedures, including that Aames conducts an appraisal primarily based upon an appraisal of the property and a calculation of the loan-to-value ratios of the loan applied for and of all

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GSAMP 2006-HE5

mortgages existing on the property, including the loan applied for the combined loan-to-value ratio, to the appraised value of the property at the time of origination. Pro. Supp. at S-45. e. Goldman Sachs statements about LTVs and CLTVs were untrue and misleading for the reasons set forth in the Complaint. Goldman Sachs knew that baselessly inflated appraisals were being used, and additional liens ignored, in order to get more loans approved. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. This is further evidenced by testimony regarding the rampant conflicts of interest within the appraisal process at the time the Certificates were issued. f. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that the ratios were much higher than represented. In fact: i. The weighted average initial LTV ratio was 88.34%; ii. 20.60% of the loans tested had an LTV ratio greater than 100%; iii. 38.89% of the loans tested had an LTV ratio greater than 90%; iv. 65.03% of the loans tested had an LTV greater than 80%. v. The weighted average initial CLTV ratio was 99.74%; vi. 52.46% of the loans tested had a CLTV ratio greater than 100%; vii. 71.86% of the loans tested had a CLTV ratio greater than 90%; viii. 83.82% of the loans tested had a CLTV greater than 80%. g. Allstates loan-level analysis has further determined that: i. 35.6% of the loans had an actual LTV ratio that was at least 10% greater than the LTV ratio those loans purportedly had.

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GSAMP 2006-HE5

ii. 9.1% of the loans had an actual LTV ratio that was at least 25% greater than the LTV ratio those loans purportedly had. iii. 31.1% of the loans had an actual CLTV ratio that was at least 10% greater than the CLTV ratio those loans purportedly had. iv. 14.6% of the loans had an actual CLTV ratio that was at least 25% greater than the CLTV ratio those loans purportedly had. 6. Untrue and misleading statements about the sufficiency of the borrowers income in the GSAMP 2006-HE5 Offering Documents: a. The non-zero weighted average debt to income ratio at origination for the mortgage loans in the collateral pool was purportedly 42.63%. Pro. Supp. p. S13. b. Aames Fundings Super Aim guidelines generally permit a maximum debt-toincome ratio (DTI) of 50% . . . . For full documentation or limited documentation loans with LTVs of 85% or less, the maximum DTI is 55%, and for loans with LTVs of greater than 95%, the maximum DTI is 45%. Interestonly loans, limited to the A+, A and A- credit grades, had a generally higher minimum credit score of 580, and a maximum DTI of 50%. Pro. Supp. p. S-46. c. Goldman Sachs statements about the borrowers income were untrue and misleading for the reasons set forth in the Complaint. As the underwriting procedures were systematically abandoned, representations regarding the sufficiency of the borrowers income were baseless. Borrowers, often at the lenders coaching, routinely inflated their incomes. These representations falsity is confirmed by the sudden and rising default and delinquency rates for the

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GSAMP 2006-HE5

Mortgage Loans, which shows borrowers were put into loans they could not afford. 7. Untrue and misleading statements about credit ratings in the GSAMP 2006-HE5 Offering Documents: a. In order to be issued, the offered certificates must be assigned ratings not lower than the following by Standard & Poors Ratings Services, a division of The McGraw-Hill Companies, Inc. (S&P) and Moodys Investors Service, Inc. (Moodys): [chart] . . . . A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans to which they are entitled to by the Final Scheduled Distribution Date. Pro. Supp. p. S-136. b. It is a condition to the issuance of the securities of each series offered by this prospectus and by the related prospectus supplement that the nationally recognized statistical rating agency or agencies specified in the prospectus supplement shall have rated the securities in one of the four highest rating categories. Prospectus p. 127. c. The initial and current ratings for the Certificates Allstate purchased are set forth in the Complaint. d. Goldman Sachs statements about credit ratings were untrue and misleading for the reasons set forth in the Complaint. Unknown to Allstate, the rating agencies were fed baseless and false statistics regarding the loans, as evidenced by a statistical analysis of the Mortgage Loans at issue here, rendering the ratings relied upon meaningless.

D-9

GSAMP 2006-HE5

8. Untrue and misleading statements regarding case-by-case underwriting exceptions in the GSAMP 2006-HE5 Offering Documents: a. If an individual loan application does not meet Aames Fundings formal written underwriting guidelines, its underwriters can make underwriting exceptions up to certain limits within its formal exception policies and approval authorities. Pro. Supp. p. S-45. b. Pursuant to the Goldman Sachs Mortgage Conduit Program, [i]n certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant [Goldman Sachs Mortgage Company] to make certain exceptions to these [underwriting] guidelines. In such instances [Goldman Sachs Mortgage Company] would purchase a mortgage loan that did not completely conform to the guidelines . . . . Prospectus p. 30. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the representation that exceptions to the underwriting guidelines were made on a case-by-case basis was at best misleading and at worst false. The exceptions became the rule, and the guidelines were systematically ignored. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 9. Untrue and misleading statements regarding credit enhancements in the GSAMP 2006-HE5 Offering Documents: a. Credit EnhancementSubordination of the subordinate certificates to the senior certificates as described in this prospectus supplement under Description of the

D-10

GSAMP 2006-HE5

CertificatesPriority of Distributions and Allocation of Losses. Excess Interest and overcollateralization as described in this prospectus supplement under Description of the CertificatesOvercollateralization Provisions. Pro. Supp. p. S-1. See also Prospectus at pp. 45-54. b. Credit Enhancement. The credit enhancement provided for the benefit of the holders of the certificates consists solely of: [a] an initial overcollateralization amount of approximately 2.00% of the aggregate scheduled principal balance of the mortgage loans as of the cut-off date, [b] the use of excess interest, after taking into account certain payments received or paid by the trust pursuant to the interest rate swap agreement described below and received by the trust pursuant to the interest rate cap agreement described below, to cover losses on the mortgage loans and as a distribution of principal to maintain overcollateralization at a specified level, [c] the subordination of distributions on the more subordinate classes of certificates to the required distributions on the more senior classes of certificates, and [d] the allocation of losses on the mortgage loans to the most subordinate classes of certificates then outstanding. Pro. Supp. pp. S-11-12. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by, among other things, a loan-level analysis of the Mortgage Loans at issue here, the collateral was significantly riskier than presented, rendering representations regarding the efficacy or sufficiency of any structural credit enhancements that depended on or were derived from the quality of those loans false and misleading.

D-11

GSAMP 2006-HE5

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-5

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit E: Misrepresentations in the Offering Documents for GSAMP 2006-S4 1. Collateral type: conventional, fixed-rate, second lien residential mortgage loans with original terms to maturity from their first scheduled payment due date of not more than 30 years. 2. Initial number of mortgage loans: 11,624. 3. Untrue and misleading statements about underwriting guidelines in the GSAMP 2006-S4 Offering Documents: a. Section entitled The Mortgage Loan Pool (GSAMP 2006-S4 Pro. Supp. pp. S32 to S-33), and representations therein, including the representation that the loans originated or acquired by IndyMac and AHMC (together, 97.66% of the loans) were acquired generally in accordance with the underwriting guidelines described in detail in the offering documents. GSAMP 2006-S4 Pro. Supp. p. S32. b. Section entitled IndyMac Underwriting Guidelines (GSAMP 2006-S4 Pro. Supp. pp. S-34 to S-38), and representations therein, including the representation that Mortgage loans that are acquired by IndyMac are underwritten by IndyMac according to IndyMacs underwriting guidelines, which also accept mortgage loans meeting Fannie Mae or Freddie Mac guidelines regardless of whether such mortgage loans would otherwise meet IndyMacs guidelines, or pursuant to an exception to those guidelines based on IndyMac's procedures for approving such exceptions. . . . IndyMacs underwriting criteria for traditionally underwritten mortgage loans includes an analysis of the borrowers credit history, ability to

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GSAMP 2006-S4

repay the mortgage loan and the adequacy of the mortgaged property as collateral. GSAMP 2006-S4 Pro. Supp. p. S-35. c. Section entitled American Home Underwriting Guidelines (GSAMP 2006-S4 Pro. Supp. pp. S-37 to S-39), and representations therein, including the representation that AHMCs underwriting philosophy is to weigh all risk factors inherent in the loan file, giving consideration to the individual transaction, borrower profile, the level of documentation provided and the property used to collateralize the debt . . . . AHMC underwrites a borrowers creditworthiness based solely on information that AHMC believes is indicative of the applicants willingness and ability to pay the debt they would be incurring. GSAMP 2006S4 Pro. Supp. p. S-39. d. For manually underwritten loans, the underwriter must ensure that the borrowers income will support the total housing expense on an ongoing basis. Underwriters may give consideration to borrowers who have demonstrated an ability to carry a similar or greater housing expense for an extended period. In addition to the monthly housing expense, the underwriter must evaluate the borrowers ability to manage all recurring payments on all debts, including the monthly housing expense. When evaluating the ratio of all monthly debt payments to the borrowers monthly income (debt-to-income ratio), the underwriter should be aware of the degree and frequency of credit usage and its impact on the borrowers ability to repay the loan. For example, borrowers who lower their total obligations should receive favorable consideration and borrowers

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GSAMP 2006-S4

with a history of heavy usage and a pattern of slow or late payments should receive less flexibility. GSAMP 2006-S4 Pro. Supp. p. S-40. e. Goldman Sachs statements about underwriting guidelines are untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the loans were originated and acquired without regard to their quality or the stated underwriting guidelines. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 4. Untrue and misleading statements about owner occupancy in the GSAMP 2006-S4 Offering Documents: a. The Offering Documents represented that 10,227 loans (87.98%) were for owneroccupied properties. GSAMP 2006-S4 Pro. Supp. p. A-23. b. Goldman Sachs statements about owner occupancy were untrue and misleading for the reasons set forth in the Complaint. A material amount of the loans were not in fact owner-occupied, and Goldman Sachs omitted that the given statistics were (due to the abandonment of the disclosed underwriting standards) baseless. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. c. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that Goldman Sachs drastically overstated the percentage of owner-occupied properties secured by Mortgage Loans in the collateral pool. i. Of the 1,423 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the owner of the

E-3

GSAMP 2006-S4

property instructed tax authorities to send property tax bills to him or her at a different address, or listed a different address as the one for the property owners property tax exemption: 91. ii. Of the 1,423 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which creditors reported a different property address as the customers mailing address six months after the origination of the securitized loan: 192. iii. Of the 1,423 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the borrower owned other properties during the same time period of ownership of the securitized property: 73. iv. Of the 1,423 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower did not list the securitized property as the owners primary residence: 182. v. Of the 1,423 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower had liens that did not list the securitized property as the owners primary residence: 363. vi. In sum, of the 1,423 Mortgage Loans tested that were allegedly secured by owner-occupied properties, the non-duplicative number of loans that appear not to be owner-occupied, based on their failure of at least two of

E-4

GSAMP 2006-S4

Allstates analytical tests: 205, representing 14.4% of the Mortgage Loans tested that were allegedly secured by owner-occupied properties. 5. Untrue and misleading statements about LTV ratios in the GSAMP 2006-S4 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including details regarding the LTV characteristics of the loans and the mortgage pool as a whole. GSAMP 2006-S4 Pro. Supp. pp. A-21 to A-22. The statistics in the pool were incorrect because many of the LTV ratios for the individual loans were miscalculated. b. Page A-21 stated that the weighted average original LTV ratio for the loans in the collateral pool was 20.09%. However, Allstates loan-level analysis of the mortgages has determined that the weighted average LTV ratio was actually higher, 22.40%. c. Goldman Sachs stated the following with respect to IndyMac: Maximum loanto-value and combined loan-to-value ratios and loan amounts are established according to the occupancy type, loan purpose, property type, FICO Credit Score, number of previous late mortgage payments, and the age of any bankruptcy or foreclosure actions. Additionally, maximum total monthly debt payments-toincome ratios and cash-out limits may be applied. Other factors may be considered in determining loan eligibility such as a borrowers residency and immigration status, whether a non-occupying borrower will be included for qualification purposes, sales or financing concessions included in any purchase contract, the acquisition cost of the property in the case of a refinance transaction,

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GSAMP 2006-S4

the number of properties owned by the borrower, the type and amount of any subordinate mortgage, the amount of any increase in the borrowers monthly mortgage payment compared to previous mortgage or rent payments and the amount of disposable monthly income after payment of all monthly expenses. GSAMP 2006-S4 Pro. Supp. at S-36. d. To determine the adequacy of the property to be used as collateral, an appraisal is generally made of the subject property in accordance with the Uniform Standards of Profession [sic] Appraisal Practice. The appraiser generally inspects the property, analyzes data including the sales prices of comparable properties and issues an opinion of value using a Fannie Mae/Freddie Mac appraisal report form, or other acceptable form. In some cases, an automated valuation model (AVM) may be used in lieu of an appraisal. AVMs are computer programs that use real estate information, such as demographics, property characteristics, sales prices, and price trends to calculate a value for the specific property. The value of the property, as indicated by the appraisal or AVM, must support the loan amount. GSAMP 2006-S4 Pro. Supp. p. S-37. e. Goldman Sachs stated the following with respect to AHMC: Every mortgage loan is secured by a property that has been appraised by a licensed appraiser in accordance with the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation. The appraisers perform on-site inspections of the property and report on the neighborhood and property condition in factual and specific terms. Each appraisal contains an opinion of value that represents the appraisers professional conclusion based on market data of sales of comparable properties

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GSAMP 2006-S4

and a logical analysis with adjustments for differences between the comparable sales and the subject property and the appraisers judgment. In addition, each appraisal is reviewed for accuracy and consistency by AHMCs vendor management company or an underwriter of AHMC or a mortgage insurance company contract underwriter. GSAMP 2006-S4 Pro. Supp. p. S-40. f. The appraisers value conclusion is used to calculate the ratio (combined loan-tovalue) of the loan amount(s) to the value of the property. For loans made to purchase a property, this ratio is based on the lower of the sales price of the property and the appraised value. AHMC sets various maximum combined loanto-value ratios based on the loan amount, property type, loan purpose and occupancy of the subject property securing the loan. In general, AHMC requires lower combined loan-to-value ratios for those loans that are perceived to have a higher risk, such as high loan amounts, loans in which additional cash is being taken out on a refinance transaction, loans on second homes or loans on investment properties. A lower combined loan-to-value ratio requires a borrower to have more equity in the property, which is a significant additional incentive to the borrower to avoid default on the loan. GSAMP 2006-S4 Pro. Supp. p. S-40. g. Goldman Sachs stated the following with respect to the Goldman Sachs Mortgage Conduit Program: An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the related mortgage loan. All appraisals must be on

E-7

GSAMP 2006-S4

forms acceptable to Fannie Mae and/or Freddie Mac and conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Appraisers may be staff licensed appraisers employed by the originator or independent licensed appraisers selected in accordance with established appraisal procedure guidelines acceptable to the originator. Generally, the appraisal procedure guidelines require the appraiser or an agent on its behalf to inspect the property personally and verify whether the property is in good condition and that, if new, construction has been substantially completed. The appraisal generally will be based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. GSAMP 2006-S4 Prospectus pp. 32-33. h. The prospectus also stated that, pursuant to the Goldman Sachs Mortgage Conduit program, the maximum LTV ratio was 100% or lower. GSAMP 2006-S4 Prospectus pp. 31-32. i. Goldman Sachss statements about LTVs are also untrue and misleading for the reasons set forth in the Complaint. 6. Untrue and misleading statements about CLTV ratios in the GSAMP 2006-S4 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including a description of the CLTV ratios of the loans and the mortgage pool as a whole. GSAMP 2006-S4 Pro. Supp. p. A-

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GSAMP 2006-S4

22. The statistics in the pool were incorrect because many of the CLTV ratios for the individual loans were miscalculated. b. Among other statistics, the chart on page A-22 made the following untrue and misleading statements about the mortgage loans in the collateral pool: i. The weighted average initial CLTV ratio was 95.45%. ii. No loans had a CLTV ratio greater than 100%. iii. 8,446 loans (72.66% of the total initial mortgage loans) had a CLTV ratio greater than 90%. iv. 11,148 loans (95.91% of the total initial mortgage loans) had a CLTV ratio greater than 80%. c. Goldman Sachs statements about CLTVs were untrue and misleading for the reasons set forth in the Complaint. Goldman Sachs knew that baselessly inflated appraisals were being used, and additional liens ignored, in order to get more loans approved. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. This is further evidenced by testimony regarding the rampant conflicts of interest within the appraisal process at the time the Certificates were issued. d. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that the CLTV ratios were on average much higher than represented. In fact: i. The weighted average initial CLTV ratio was 107.63%. ii. 58.41% of the loans tested had a CLTV ratio greater than 100%. iii. 80.95% of the loans tested had a CLTV ratio greater than 90%.

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GSAMP 2006-S4

iv. 93.11% of the loans tested had a CLTV ratio greater than 80%. e. Allstates loan-level analysis has further determined that: i. 40.34% of the loans had an actual CLTV ratio that was at least 10% greater than the CLTV ratios those loans purportedly had. ii. 14.94% of the loans had an actual CLTV that was at least 25% greater than the CLTV ratios those loans purportedly had. 7. Untrue and misleading statements about credit ratings in the GSAMP 2006-S4 Offering Documents: a. Goldman Sachs stated that In order to be issued, the Offered Certificates must be assigned ratings not lower than the following by Standard & Poors, a division of The McGraw-Hill Companies, Inc. (S&P) and Moodys Investors Service, Inc. (MOODYS): [chart] . . . . A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. GSAMP 2006-S4 Pro. Supp. pp. S-103 to S-104. b. Goldman Sachs stated that It is a condition to the issuance of the securities of each series offered by this prospectus and by the related prospectus supplement that the nationally recognized statistical rating agency or agencies specified in the prospectus supplement shall have rated the securities in one of the four highest rating categories. GSAMP 2006-S4 Prospectus p. 127. c. Goldman Sachs statements about credit ratings were untrue and misleading for the reasons set forth in the Complaint. Unknown to Allstate, the rating agencies were fed baseless and false statistics regarding the loans, as evidenced by a

E-10

GSAMP 2006-S4

statistical analysis of the Mortgage Loans at issue here, rendering the ratings relied upon meaningless. 8. Untrue and misleading statements regarding case-by-case underwriting exceptions in the GSAMP 2006-S4 Offering Documents: a. Goldman Sachs represented that IndyMac has procedures to override an e-MITS decision to allow for compensating factors. GSAMP 2006-S4 Pro. Supp. p. S-35. b. Goldman Sachs represented that Mortgage loans that do not meet IndyMacs guidelines may be manually re-underwritten and approved under an exception to those underwriting guidelines. GSAMP 2006-S4 Pro. Supp. p. S-37. c. Goldman Sachs represented that Traditional underwriting decisions are made by individuals authorized to consider compensating factors that would allow mortgage loans not otherwise meeting IndyMacs guidelines. GSAMP 2006-S4 Pro. Supp. p. S-35. Exceptions to underwriting standards are permitted in situations in which compensating factors exist. Examples of these factors are significant financial reserves, a low loan-to-value ratio, significant decrease in the borrowers monthly payment and long-term employment with the same employer. Id. at S-37. d. Goldman Sachs represented that [E]ach case is weighed individually on its own merits and exceptions to AHMCs underwriting guidelines are allowed if sufficient compensating factors exist to offset any additional risk due to the exception. GSAMP 2006-S4 Pro. Supp. p. S-40. e. Goldman Sachs represented that, pursuant to the Goldman Sachs Mortgage Conduit Program, [i]n certain instances, compensating factors demonstrated to

E-11

GSAMP 2006-S4

the mortgage loan originator by a prospective borrower may warrant [Goldman Sachs Mortgage Company] to make certain exceptions to these [underwriting] guidelines. In such instances [Goldman Sachs Mortgage Company] would purchase a mortgage loan that did not completely conform to the guidelines . . . . GSAMP 2006-S4 Prospectus p. 30. f. These statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the representation that exceptions to the underwriting guidelines were made on a case-by-case basis was at best misleading and at worst false. The exceptions became the rule, and the guidelines were systematically ignored. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 9. Untrue and misleading statements regarding credit enhancements in the GSAMP 2006-S4 Offering Documents: a. Credit EnhancementSubordination of the subordinate certificates to the senior certificates as described in this prospectus supplement under Description Of The CertificatesDistributions Of Interest And Principal. A yield maintenance agreement as described in this prospectus supplement under Description Of The CertificatesYield Maintenance Agreement. Excess interest and overcollateralization as described in this prospectus supplement under Description Of The CertificatesOvercollateralization Provisions. GSAMP 2006-S4 Pro. Supp. p. S-1; see GSAMP 2006-S4 Prospectus pp. 45-54.

E-12

GSAMP 2006-S4

b. Credit Enhancement. The credit enhancement provided for the benefit of the holders of the certificates consists solely of: [a] the use of excess interest to cover losses on the mortgage loans and as distribution of principal to build or maintain overcollateralization, [b] overcollateralization, [c] the subordination of distributions on the more subordinate classes of certificates to the required distributions on the more senior classes of certificates, [d] a yield maintenance agreement, and [e] the allocation of losses on the mortgage loans to the most subordinate classes of certificates then outstanding. GSAMP 2006-S4 Pro. Supp. p. S-10. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by, among other things, a loan-level analysis of the Mortgage Loans at issue here, the collateral was significantly riskier than presented, rendering representations regarding the efficacy or sufficiency of any structural credit enhancements that depended on or were derived from the quality of those loans false and misleading.

E-13

GSAMP 2006-S4

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-6

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit F: Misrepresentations in the Offering Documents for GSAMP 2006-S3 1. Collateral type: conventional, fixed-rate, second lien residential mortgage loans with original terms to maturity from their first scheduled payment due date of not more than 30 years. 2. Initial number of mortgage loans: 8,274. 3. Untrue and misleading statements about underwriting guidelines in the GSAMP 2006-S3 Offering Documents: a. Section entitled, The Mortgage Loan Pool (GSAMP 2006-S3 Pro. Supp. pp. S30 to S-32), and representations therein, including that the loans originated or acquired by Fremont and Long Beach (together, 89.44% of the loans) were originated or acquired generally in accordance with the underwriting guidelines described in detail in the offering documents. GSAMP 2006-S3 Pro. Supp. p. S30. b. Section entitled Fremont Underwriting Guidelines, (GSAMP 2006-S3 Pro. Supp. pp. S-33 to S-37), and representations therein, including the representation that All of the Fremont mortgage loans were originated or acquired by Fremont generally in accordance with the underwriting criteria described in this section. The following is a general summary of the underwriting guidelines believed by the Depositor to have been applied, with some variation, by Fremont to the Fremont mortgage loans. GSAMP 2006-S3 Pro. Supp. p. S-33. Fremonts underwriting guidelines are primarily intended to assess the ability and willingness of the borrower to repay the debt and to evaluate the adequacy of the

F-1

GSAMP 2006-S3

mortgaged property as collateral for the mortgage loan. GSAMP 2006-S3 Pro. Supp. p. S-33. c. Fremont conducts a number of quality control procedures, including a postfunding review as well as a full re-underwriting of a random selection of loans to assure asset quality. Under the funding review, all loans are reviewed to verify credit grading, documentation compliance and data accuracy. Under the asset quality procedure, a random selection of each months originations is reviewed. The loan review confirms the existence and accuracy of legal documents, credit documentation, appraisal analysis and underwriting decision. A report detailing review findings and level of error is sent monthly to each loan production office for response. The review findings and branch responses are then reviewed by Fremonts senior management. Adverse findings are tracked monthly. This review procedure allows Fremont to assess programs for potential guideline changes, program enhancements, appraisal policies, areas of risk to be reduced or eliminated and the need for additional staff training. GSAMP 2006-S3 Pro. Supp. p. S-35. Borrower eligibility for loans depended, in part, on whether the property was to be owner-occupied. GSAMP 2006-S3 Pro. Supp. p. S-36. d. Section entitled Long Beach Underwriting Guidelines (GSAMP 2006-S3 Pro. Supp. pp. S-37 to S-40), and representations therein, including the representation that Long Beachs underwriting guidelines are primarily intended to evaluate the prospective borrowers credit standing and repayment ability as well as the value and adequacy of the mortgaged property as collateral. GSAMP 2006-S3 Pro. Supp. p. S-37. Prospective borrowers are required to complete a standard loan

F-2

GSAMP 2006-S3

application in which they provide financial information regarding the amount of income and related sources, liabilities and related monthly payments, credit history and employment history, as well as certain other personal information. During the underwriting or re-underwriting process, Long Beach reviews and verifies the prospective borrowers sources of income (only under the full documentation residential loan program), calculates the amount of income from all such sources indicated on the loan application, reviews the credit history and credit score(s) of the prospective borrower and calculates the debt-to-income ratio to determine the prospective borrowers ability to repay the loan, and determines whether the mortgaged property complies with Long Beachs underwriting guidelines. GSAMP 2006-S3 Pro. Supp. p. S-38. e. QUALITY CONTROL REVIEW. As part of its quality control system, Long Beach re-verifies information that has been provided by the mortgage brokerage company prior to funding a loan and Long Beach conducts a post-funding audit of every origination file. In addition, Washington Mutual Bank (WMB), as subservicer, periodically audits files based on a statistical sample of closed loans. In the course of its pre-funding review, Long Beach re-verifies the income of each prospective borrower or, for a self-employed prospective borrower, reviews the income documentation obtained under the full documentation and limited documentation residential loan programs. Long Beach generally requires evidence of funds to close on the mortgage loan. GSAMP 2006-S3 Pro. Supp. p. S-40.

F-3

GSAMP 2006-S3

f. Goldman Sachs statements about underwriting guidelines are untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the loans were originated and acquired without regard to their quality or the stated underwriting guidelines. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 4. Untrue and misleading statements about owner occupancy in the GSAMP 2006-S3 Offering Documents: a. The Offering Documents represented that 7,780 loans (94.0%) were issued for owner-occupied properties. GSAMP 2006-S3 Pro. Supp. p. A-22. b. Goldman Sachs statements about owner occupancy were untrue and misleading for the reasons set forth in the Complaint. A material amount of the loans were not in fact owner-occupied, and Goldman Sachs omitted that the given statistics were (due to the abandonment of the disclosed underwriting standards) baseless. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. c. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that Goldman Sachs drastically overstated the percentage of owner-occupied properties secured by Mortgage Loans in the collateral pool. i. Of the 1,507 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the owner of the property instructed tax authorities to send property tax bills to him or her

F-4

GSAMP 2006-S3

at a different address, or listed a different address as the one for the property owners property tax exemption: 92. ii. Of the 1,507 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which creditors reported a different property address as the customers mailing address six months after the origination of the securitized loan: 191. iii. Of the 1,507 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the borrower owned other properties during the same time period of ownership of the securitized property: 78. iv. Of the 1,507 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower did not list the securitized property as the owners primary residence: 187. v. Of the 1,507 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower had liens that did not list the securitized property as the owners primary residence: 275. vi. In sum, of the 1,507 Mortgage Loans tested that were allegedly secured by owner-occupied properties, the non-duplicative number of loans that appear not to be owner-occupied, based on their failure of at least two of Allstates analytical tests: 201, representing 13.3% of the Mortgage Loans tested that were allegedly secured by owner-occupied properties.

F-5

GSAMP 2006-S3

5. Untrue and misleading statements about LTV ratios in the GSAMP 2006-S3 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including details regarding the LTV characteristics of the loans and the mortgage pool as a whole. Pro. Supp. pp. A20 to 21. The statistics for the pool were incorrect because many of the LTV ratios for the individual loans were miscalculated. b. Page A-20 stated that the weighted average original LTV ratio for the loans in the collateral pool was 19.39%. However, Allstates loan-level analysis of the mortgages has determined that that weighted average LTV ratio was actually higher, 21.45%. c. Goldman Sachs stated the following with respect to Fremont: Fremonts underwriting guidelines are applied in accordance with a procedure which complies with applicable federal and state laws and regulations and require an appraisal of the mortgaged property, and if appropriate, a review appraisal. Generally, initial appraisals are provided by qualified independent appraisers licensed in their respective states. Review appraisals may only be provided by appraisers approved by Fremont. In some cases, Fremont relies on a statistical appraisal methodology provided by a third-party. Qualified independent appraisers must meet minimum standards of licensing and provide errors and omissions insurance in states where it is required to become approved to do business with Fremont. Each uniform residential appraisal report includes a market data analysis based on recent sales of comparable homes in the area and,

F-6

GSAMP 2006-S3

where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. GSAMP 2006-S3 Pro. Supp. p. S-34. d. Goldman Sachs stated the following with respect to Long Beach: The adequacy of the mortgaged property as collateral is generally determined by an appraisal of the mortgaged property that generally conforms to Fannie Mae and Freddie Mac appraisal standards and a review of that appraisal. The mortgaged properties are appraised by licensed independent appraisers who have satisfied the servicers appraiser screening process. In most cases, properties in below average condition, including properties requiring major deferred maintenance, are not acceptable under Long Beachs underwriting programs. Each appraisal includes a market data analysis based on recent sales of comparable homes in the area and, where deemed appropriate, replacement cost analysis based on the current cost of constructing a similar home. GSAMP 2006-S3 Pro. Supp. p. S-39. The maximum allowable loan-to-value ratio varies based upon the residential loan program, income documentation, property type, creditworthiness and debt service-to-income ratio of the prospective borrower and the overall risks associated with the loan decision. GSAMP 2006-S3 Pro. Supp. p. S-38. Long Beach also represented that it considered whether the property was owner occupied in determining borrower eligibility for the loan. GSAMP 2006-S3 Pro. Supp. p. S-40. e. Goldman Sachs stated the following with respect to the Goldman Sachs Mortgage Conduit Program: An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in

F-7

GSAMP 2006-S3

accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the related mortgage loan. All appraisals must be on forms acceptable to Fannie Mae and/or Freddie Mac and conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Appraisers may be staff licensed appraisers employed by the originator or independent licensed appraisers selected in accordance with established appraisal procedure guidelines acceptable to the originator. Generally, the appraisal procedure guidelines require the appraiser or an agent on its behalf to inspect the property personally and verify whether the property is in good condition and that, if new, construction has been substantially completed. The appraisal generally will be based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. GSAMP 2006-S3 Prospectus pp. 32-33. f. The prospectus also stated that, pursuant to the Goldman Sachs Mortgage Conduit program, the maximum LTV ratio was 100% or lower. Prospectus pp. 31-32. g. Goldman Sachss statements about LTVs are also untrue and misleading for the reasons set forth in the Complaint.

F-8

GSAMP 2006-S3

6. Untrue and misleading statements about CLTV ratios in the GSAMP 2006-S3 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including a description of the CLTV ratios of the loans and the mortgage pool as a whole. GSAMP 2006-S3 Pro. Supp. p. A21. The statistics in the pool were incorrect because many of the CLTV ratios for the individual loans were miscalculated. b. Among other statistics, the chart on page A-21 made the following untrue and misleading statements about the mortgage loans in the collateral pool: i. The weighted average initial CLTV ratio was 99.29%. ii. No loans had a CLTV ratio greater than 100%. iii. 8,010 loans (96.81% of the total initial mortgage loans) had a CLTV ratio greater than 90%. iv. 8,259 loans (99.82% of the total initial mortgage loans) had a CLTV ratio greater than 80%. c. Goldman Sachs statements about CLTVs were untrue and misleading for the reasons set forth in the Complaint. Goldman Sachs knew that baselessly inflated appraisals were being used, and additional liens ignored, in order to get more loans approved. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. This is further evidenced by testimony regarding the rampant conflicts of interest within the appraisal process at the time the Certificates were issued, as reflected in the Complaint.

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GSAMP 2006-S3

d. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that the CLTV ratios were on average much higher than represented. In fact: i. The weighted average initial CLTV ratio was 112.55%. ii. 76.17% of the loans tested had a CLTV ratio greater than 100%. e. Allstates loan-level analysis has further determined that: i. 42.4% of the loans had an actual CLTV ratio that was at least 10% greater than the CLTV ratios those loans purportedly had. ii. 14.4% of the loans had an actual CLTV ratio that was at least 25% greater than the CLTV ratios those loans purportedly had. 7. Untrue and misleading statements about credit ratings in the GSAMP 2006-S3 Offering Documents: a. Goldman Sachs stated that In order to be issued, the offered certificates must be assigned ratings not lower than the following by Standard & Poors, a division of The McGraw-Hill Companies, Inc. (S&P) and Moodys Investors Service, Inc. (MOODYS): [chart] . . . . A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. GSAMP 2006-S3 Pro. Supp. pp. S-107 to S-108. b. Goldman Sachs stated that It is a condition to the issuance of the securities of each series offered by this prospectus and by the related prospectus supplement that the nationally recognized statistical rating agency or agencies specified in the prospectus supplement shall have rated the securities in one of the four highest rating categories. GSAMP 2006-S3 Prospectus p. 127.

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GSAMP 2006-S3

c. Goldman Sachs statements about credit ratings were untrue and misleading for the reasons set forth in the Complaint. Unknown to Allstate, the rating agencies were fed baseless and false statistics regarding the loans, as evidenced by a statistical analysis of the Mortgage Loans at issue here, rendering the ratings that Allstate relied upon meaningless. 8. Untrue and misleading statements regarding case-by-case underwriting exceptions in the GSAMP 2006-S3 Offering Documents: a. Goldman Sachs represented that On a case by case basis, Fremont may determine that, based upon compensating factors, a prospective mortgagor not strictly qualifying under the underwriting risk category guidelines described below is nonetheless qualified to receive a loan, i.e., an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt to income ratio, substantial liquid assets, good credit history, stable employment and time in residence at the applicants current address. GSAMP 2006-S3 Pro. Supp. p. S-34. b. Goldman Sachs represented that On a case-by-case basis and only with the approval of an employee with appropriate risk level authority, Long Beach may determine that, based upon compensating factors, a prospective borrower not strictly qualifying under its underwriting risk category guidelines warrants an underwriting exception. Compensating factors may include, but are not limited to, low loan-to-value ratio, low debt-to-income ratio, good credit history, stable employment and time in residence at the prospective borrowers current address. GSAMP 2006-S3 Pro. Supp. p. S-39.

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GSAMP 2006-S3

c. Goldman Sachs represented that, pursuant to the Goldman Sachs Mortgage Conduit Program, [i]n certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant [Goldman Sachs Mortgage Company] to make certain exceptions to these [underwriting] guidelines. In such instances [Goldman Sachs Mortgage Company] would purchase a mortgage loan that did not completely conform to the guidelines . . . . GSAMP 2006-S3 Prospectus p. 30. d. These statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the representation that exceptions to the underwriting guidelines were made on a case-by-case basis was at best misleading and at worst false. The exceptions became the rule, and the guidelines were systematically ignored. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 9. Untrue and misleading statements regarding credit enhancements in the GSAMP 2006-S3 Offering Documents: a. Credit EnhancementSubordination of the subordinate certificates to the senior certificates as described in this prospectus supplement under Description Of The CertificatesDistributions Of Interest And Principal; A yield maintenance agreement as described in this prospectus supplement under Description Of The CertificatesYield Maintenance Agreement; and Excess interest and overcollateralization as described in this prospectus supplement under

F-12

GSAMP 2006-S3

Description Of The CertificatesOvercollateralization Provisions. GSAMP 2006-S3 Pro. Supp. p. S-1; see also GSAMP 2006-S3 Prospectus pp. 45-54. b. Credit Enhancement. The credit enhancement provided for the benefit of the holders of the certificates consists solely of: [a] the use of excess interest to cover losses on the mortgage loans and as distribution of principal to build or maintain overcollateralization, [b] overcollateralization, [c] the subordination of distributions on the more subordinate classes of certificates to the required distributions on the more senior classes of certificates, [d] a yield maintenance agreement, and [e] the allocation of losses on the mortgage loans to the most subordinate classes of certificates then outstanding. GSAMP 2006-S3 Pro. Supp. p. S-10. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by, among other things, a loan-level analysis of the Mortgage Loans at issue here, the collateral was significantly riskier than presented, rendering representations regarding the efficacy or sufficiency of any structural credit enhancements that depended on or were derived from the quality of those loans false and misleading.

F-13

GSAMP 2006-S3

FILED: NEW YORK COUNTY CLERK 08/15/2011

NYSCEF DOC. NO. 1-7

INDEX NO. 652273/2011 RECEIVED NYSCEF: 08/15/2011

Exhibit G: Misrepresentations in the Offering Documents for GSAA 2006-13 1. Collateral type: conventional, Alt-A type, fixed-rate, first lien residential mortgage loans with original terms to maturity from their first scheduled payment due date of not more than 30 years. 2. Initial number of mortgage loans: 1,921. 3. Untrue and misleading statements about underwriting guidelines in the GSAA 2006-13 Offering Documents: a. Section entitled, The Mortgage Loan Pool (GSAA 2006-13 Pro. Supp. pp. S-37 to S-39), and representations therein, including the representation that The mortgage loans were originated or acquired generally in accordance with the underwriting guidelines described in this prospectus supplement. See --Opteum Financial Services Underwriting Standards and --Goldman Sachs Mortgage Conduit Underwriting Guidelines below. GSAA 2006-13 Pro. Supp. p. S-37. b. Section entitled, Opteum Financial Services Underwriting Guidelines (GSAA 2006-13 Pro. Supp. pp. S-40 to S-53), and representations therein, including the representation that The mortgage loans that were originated by Opteum were underwritten pursuant to, or in accordance with, the standards of Opteums Five Star Series (TM) Program, Five Star Expanded (TM) Program or Five Star Plus (TM) program guidelines. In addition, some of [sic] mortgage loans were originated by Opteums conduit division pursuant to Alternative A credit guidelines and were underwritten pursuant to underwriting standards with varying documentation type, loan-to-value ratios, combined loan-to-value ratios and/or

G-1

GSAA 2006-13

credit standards etc. from those described below. GSAA 2006-13 Pro. Supp. p. S-41. c. General. Loans originated under Opteums Five Star Series(TM) program, the Five Star Plus(TM) program as described within the guidelines originated through Opteums retail platform is designed for borrowers who have demonstrated an excellent credit history. Opteums Five Star Expanded(TM) program includes the following specific details. Opteum generally begins its origination process by performing a pre-funding audit on each mortgage loan originated by Opteums retail and wholesale origination platforms including a review for compliance with the related program parameters and accuracy of the legal documents. Opteum generally performs verbal audits of the borrowers income or employment and a verification of social security numbers of each borrower, and reviews the property ownership history that is provided by outside services prior to the disbursement of the loan. For loans purchased under Opteums conduit flow programs, generally, an eligibility review is performed on each loan to insure compliance to the related program parameters and to review the accuracy of the legal documentation used at the closing of the loan transaction. The conduit-seller makes certain representations and warranties, in its respective agreement with Opteum, for each of the mortgage loans purchased by the conduit. Opteum also includes in its origination process a post-closing quality control review, which covers a minimum of 10% of the mortgage loans originated. This review generally includes a complete re-verification of income, liquid assets and employment that the borrower used to qualify for the mortgage loan, as well as procedures to detect

G-2

GSAA 2006-13

evidence of fraudulent documentation and/or imprudent behavior or activity during the processing and funding of the mortgage loan. Verification of occupancy and applicable information is also obtained by regular mail. GSAA 2006-13 Pro. Supp. p. S-41. d. Goldman Sachs represented that The underwriting guidelines utilized in The Five Star Series (TM) Program, as developed by Opteum, are intended to evaluate an applicants credit score, credit history, financial condition, and repayment ability as well as to evaluate the adequacy of the mortgaged property as collateral for the loan. The Five Star Series (TM) Program provides for consistent credit criteria for all documentation types with specific reserve requirements, qualifying ratios, loan-to-value and combined loan-to-value restrictions for each type of program offered. The philosophy of The Five Star Series(TM) Program encompasses a complete review of the entire mortgage loan application together with the collateral being secured and an analysis of the risk assessment of the attributes of the particular loan with emphasis on the overall quality of the mortgage loan. Each mortgage loan is individually underwritten for loans originated under their retail and wholesale platforms. GSAA 2006-13 Pro. Supp. p. S-44. e. Goldman Sachs represented that The underwriting guidelines utilized in The Five Star Expanded (TM) Program, as developed by Opteum, are intended to evaluate an applicants credit standing and repayment ability as well as evaluate the adequacy of the mortgaged property as collateral for the loan. GSAA 200613 Pro. Supp. p. S-48.

G-3

GSAA 2006-13

f. Section entitled Goldman Sachs Mortgage Conduit Program (GSAA Pro. Supp. pp. S-53 to S-57) and representations therein, including the representation that Substantially all of the mortgage loans acquired by [Goldman Sachs Mortgage Corporation] through its conduit program were acquired generally in accordance with the underwriting criteria described in this section. GSAA 2006-13 Pro. Supp. p. S-53. g. Goldman Sachs statements about underwriting guidelines are untrue and misleading for the reasons set forth in the Complaint. As confirmed by the sources detailed in the Complaint, the loans were originated and acquired without regard to their quality or the stated underwriting guidelines. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 4. Untrue and misleading statements about owner occupancy in the GSAA 2006-13 Offering Documents: a. The Offering Documents represented that 1,494 loans (77.8%) were issued for owner-occupied properties. GSAA 2006-13 Pro. Supp. p. A-22. b. Goldman Sachs statements about owner occupancy were untrue and misleading for the reasons set forth in the Complaint. A material amount of the loans were not in fact owner-occupied, and Goldman Sachs omitted that the given statistics were (due to the abandonment of the disclosed underwriting standards) baseless. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below.

G-4

GSAA 2006-13

c. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that Goldman Sachs drastically overstated the percentage of owner-occupied properties secured by Mortgage Loans in the collateral pool. i. Of the 1,161 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the owner of the property instructed tax authorities to send property tax bills to him or her at a different address, or listed a different address as the one for the property owners property tax exemption: 70. ii. Of the 1,161 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which creditors reported a different property address as the customers mailing address six months after the origination of the securitized loan: 109. iii. Of the 1,161 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which the borrower owned other properties during the same time period of ownership of the securitized property: 50. iv. Of the 1,161 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned by the borrower did not list the securitized property as the owners primary residence: 144. v. Of the 1,161 Mortgage Loans tested that were allegedly secured by owneroccupied properties, the number of loans on which other properties owned

G-5

GSAA 2006-13

by the borrower had liens that did not list the securitized property as the owners primary residence: 93. vi. In sum, of the 1,161 Mortgage Loans tested that were allegedly secured by owner-occupied properties, the non-duplicative number of loans that appear not to be owner-occupied, based on their failure of at least two of Allstates analytical tests: 124, representing 10.68% of the Mortgage Loans tested that were allegedly secured by owner-occupied properties. 5. Untrue and misleading statements about LTV and CLTV ratios in the GSAA 200613 Offering Documents: a. The prospectus supplement provided a statistical overview of the mortgage loans that collateralized the Certificates, including details regarding the LTV characteristics of the loans and the mortgage pool as a whole. GSAA 2006-13 Pro. Supp. p. A-21. Among other statistics, the charts made the following untrue and misleading statements about the 1,921 initial mortgage loans in the collateral pool: i. The weighted average initial LTV ratio was 74.02%. ii. No loan had an LTV ratio greater than 100%. iii. 82 loans (4.3% of the total initial mortgage loans) had an LTV ratio greater than 90%. iv. 204 loans (10.6% of the total initial mortgage loans) had an LTV ratio greater than 80%. v. The weighted average initial CLTV ratio was 81.63%. vi. No loan had a CLTV ratio greater than 100%.

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GSAA 2006-13

vii. 761 loans (39.6% of the total initial mortgage loans) had a CLTV ratio greater than 90%. viii. 1,021 loans (53.2% of the total initial mortgage loans) had a CLTV ratio greater than 80%. b. An appraisal is generally conducted on each mortgaged property by the originating lender. The appraisal must be conducted in accordance with established appraisal procedure guidelines acceptable to the originator in order to determine the adequacy of the mortgaged property as security for repayment of the related mortgage loan. All appraisals must be on forms acceptable to Fannie Mae and/or Freddie Mac and conform to the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. GSAA 2006-13 Pro. Supp. pp. S-56 to S-57. c. Generally, the appraisal procedure guidelines require the appraiser or an agent on its behalf to inspect the property personally and verify whether the property is in good condition and that, if new, construction has been substantially completed. The appraisal generally will be based upon a market data analysis of recent sales of comparable properties and, when deemed applicable, an analysis based on income generated from the property or a replacement cost analysis based on the current cost of constructing or purchasing a similar property. GSAA 2006-13 Pro. Supp. p. S-57. d. Each appraisal is completed on the applicable Fannie Mae Uniform Residential Appraisal Report along with applicable schedules and addendums if required. Each appraiser must be a state licensed or certified appraiser and meet the

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GSAA 2006-13

independent appraiser requirements for staff appraisers, or, if appropriate, be on a list of appraisers specified by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC and the Office of Thrift Supervision under their respective real estate appraisal regulations adopted in accordance with Title XI of the Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless of whether Opteum is subject to those regulations. In addition, each appraiser must be actively engaged in appraisal work, must be experienced, and must subscribe to a code of ethics that is at least as strict as the code of the American Institute of Real Estate Appraisers or the Society of Real Estate Appraisers. All appraisals must be in writing and preformed in strict accordance with all applicable local, state and federal laws, regulations and orders. In addition, all appraisals conform to the current Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal Foundation. Generally, each appraisal is reviewed in detail for completeness, accuracy and appraising logic in accordance with Fannie Mae guidelines. GSAA 2006-13 Pro. Supp. p. S-42. e. Opteum underwrites one-to-four family mortgage loans with loan-to-value ratios at origination of up to 100% depending on, among other things, a borrowers credit history, repayment ability and debt service-to-income ratio as well as the type and use of the mortgaged property. GSAA 2006-13 Pro. Supp. p. S-44. f. Goldman Sachs statements about LTVs and CLTVs were untrue and misleading for the reasons set forth in the Complaint. Goldman Sachs knew that baselessly inflated appraisals were being used, and additional liens ignored, in order to get

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more loans approved. This is evidenced by a statistical analysis of the Mortgage Loans at issue here, as described below. This is further evidenced by testimony regarding the rampant conflicts of interest within the appraisal process at the time the Certificates were issued. g. Allstates loan-level analysis of the sampled loans that had sufficient data to test has determined that the LTV ratios were on average much higher than represented. In fact: i. The weighted average initial LTV ratio was 82.0%. ii. 11.28% of the loans tested had an LTV ratio greater than 100%. iii. 25.13% of the loans tested had an LTV ratio greater than 90%. iv. 58.77% of the loans tested had an LTV greater than 80%. v. The weighted average initial CLTV ratio was 94.00%; vi. 43.18% of the loans tested had a CLTV ratio greater than 100%; vii. 58.46% of the loans tested had a CLTV ratio greater than 90%; viii. 72.31% of the loans tested had a CLTV greater than 80%. h. Allstates loan-level analysis has further determined that: i. 29.33% of the loans tested had an actual LTV ratio that was at least 10% greater than the LTV ratios those loans purportedly had. ii. 6.97% of the loans tested had an actual LTV ratio that was at least 25% greater than the LTV ratios those loans purportedly had. iii. 38.46% of the loans had an actual CLTV ratio that was at least 10% greater than the CLTV ratio those loans purportedly had.

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iv. 12.31% of the loans had an actual CLTV ratio that was at least 25% greater than the CLTV ratio those loans purportedly had. 6. Untrue and misleading statements about the sufficiency of the borrowers income in the GSAA 2006-13 Offering Documents: a. The non-zero weighted average debt to income ratio at origination for the mortgage loans in the collateral pool was purportedly 39.10%. GSAA 2006-13 Pro. Supp. p. A-1. b. Opteum underwrites one-to-four family mortgage loans with loan-to-value ratios at origination of up to 100% depending on, among other things, a borrowers credit history, repayment ability and debt service-to-income ratio as well as the type and use of the mortgaged property. GSAA 2006-13 Pro. Supp. p. S-44. c. Goldman Sachs statements about the borrowers income were untrue and misleading for the reasons set forth in the Complaint. As the underwriting procedures were systematically abandoned, representations regarding the sufficiency of the borrowers income were baseless. Borrowers, often at the lenders coaching, routinely inflated their incomes. These representations falsity is confirmed by the sudden and rising default and delinquency rates for the Mortgage Loans, which shows that borrowers were put into loans they could not afford. 7. Untrue and misleading statements about credit ratings in the GSAA 2006-13 Offering Documents: a. In order to be issued, the Offered Certificates must be assigned ratings not lower than the following by Standard & Poors Ratings Services, a division of The

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McGraw-Hill Companies, Inc. (S&P) and Moodys Investors Service, Inc. (MOODYS): [chart] . . . . A securities rating addresses the likelihood of the receipt by a certificateholder of distributions on the mortgage loans. GSAA 2006-13 Pro-Supp p. S-134. b. Goldman Sachs statements about credit ratings were untrue and misleading for the reasons set forth in the Complaint. Unknown to Allstate, the rating agencies were fed baseless and false statistics regarding the loans, as evidenced by a statistical analysis of the Mortgage Loans at issue here, rendering the ratings relied upon meaningless. 8. Untrue and misleading statements regarding case-by-case underwriting exceptions in the GSAA 2006-13 Offering Documents: a. Opteum, on a case by case basis, may determine that the prospective mortgagor warrants an exception outside the standard program guidelines. Exceptions may be granted if the loan application reflects certain compensating factors, including instances where the prospective mortgagor has demonstrated an ability to save and devote a greater portion of income to basic housing needs. Other compensating factors may include a low loan-to-value; an excellent mortgage pay history; the primary borrower possesses a higher credit score than required; a substantial net worth to suggest that the repayment of the loan is within the prospective mortgagors ability and/or the borrower has demonstrated an ability to maintain a debt-free position and the value of the mortgaged property as collateral for the loan is adequate. GSAA 2006-13 Pro. Supp. p. S-41 to S-42.

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b. Substantially all of the mortgage loans acquired by GSMC through its conduit program were acquired generally in accordance with the underwriting criteria described in this section. In certain instances, compensating factors demonstrated to the mortgage loan originator by a prospective borrower may warrant GSMC to make certain exceptions to these guidelines. GSAA 2006-13 Pro. Supp. p. S-53. c. These statements are untrue and misleading for the reasons set forth in of the Complaint. As confirmed by the sources detailed in the Complaint, the representation that exceptions to the underwriting guidelines were made on a case-by-case basis was at best misleading and at worst false. The exceptions became the rule, and the guidelines were systematically ignored. This is further supported by a statistical analysis of the Mortgage Loans at issue here, and other facts referenced in the Complaint. 9. Untrue and misleading statements regarding credit enhancements in the GSAA 2006-13 Offering Documents: a. Credit EnhancementSubordination of the subordinate certificates to the senior certificates as described in this prospectus supplement under Description of the CertificatesDistributions of Interest and Principal; and Excess interest and overcollateralization as described in this prospectus supplement under Description of the CertificatesOvercollateralization Provisions. GSAA 2006-13 Pro. Supp. p. S-1. b. Credit Enhancement. The credit enhancement provided for the benefit of the holders of the certificates consists solely of: [a] amounts available from the mortgage loans after all payments of interest and principal on the principal

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certificates have been made; [b] an initial overcollateralization amount of approximately 1.10% of the scheduled principal balance of the mortgage loans as of the cut-off date; [c] the use of excess interest to cover losses on the mortgage loans and as a distribution of principal to maintain overcollateralization; [d] the subordination of distributions on the more subordinate classes of certificates to the required distributions on the more senior classes of certificates; and [e] the allocation of losses on the mortgage loans to the most subordinate classes of certificates then outstanding. GSAA 2006-13 Pro. Supp. p. S-16. c. Goldman Sachs statements were untrue and misleading for the reasons set forth in the Complaint. As confirmed by, among other things, a loan-level analysis of the Mortgage Loans at issue here, the collateral was significantly riskier than presented, rendering representations regarding the efficacy or sufficiency of any structural credit enhancements that depended on or were derived from the quality of those loans false and misleading.

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