Mortgage mayhem, take two

Has the “great vampire squid” finally been harpooned? Until last week, the Wall Street investment bank Goldman Sachs had taken plenty of lumps in the court of public opinion—such as Rolling Stone writer Matt Taibbi’s famous and unflattering aquatic analogy—but largely dodged any serious fallout from the financial crisis. Now with the U.S.

Securities and Exchange Commission’s lawsuit, accusing the bank of committing outright fraud in the way it packaged and sold mortgage investments to some clients, the firm faces a crisis of its own.

The agency accused the bank and one of its vice-presidents of selling a package of subprime mortgage securities to investors even though it was betting the underlying mortgages were destined to blow up. For its part, Goldman Sachs has dismissed the lawsuit as “completely unfounded in law and fact.” Ultimately, that will be up to the courts to decide.

Yet even as the SEC tries to unravel the last financial crisis, there are signs the next one is taking shape. America’s already crippled housing market appears destined for more pain. Even though confidence among home builders has rebounded, that hasn’t translated to buyers. Sales of new and existing homes fell in February, while the length of time homes are sitting on the market waiting for buyers has spiked. Prices had shown some positive signs of firming up over the winter, but the recovery has stalled. A growing number of analysts are predicting a “double dip” for the market.

Meanwhile, foreclosures have kept right on rising, despite Washington’s loan modification program. The number of filings in the first quarter jumped 16 per cent to 932,000 from a year ago. One in every 138 U.S. homes were hit with a default notice.

If the housing market gets much worse, the Goldman Sachs case could be played out against the backdrop of yet another downturn. As for that sound you hear—that’s the bank’s critics sharpening their harpoons. M