The disclosures are the latest sign government officials are stepping up action against banks that packaged home loans into bonds during the housing boom. The underlying mortgages later soured, spurring billions in losses for investors. Goldman [GS Loading... () 
] and Wells Fargo [WFC Loading... () ] both said they received so-called "Wells notices" from the U.S. Securities and Exchange Commission. A Wells notice indicates SEC staff plan to recommend that the agency take legal action and gives a recipient a chance to mount a defense. Goldman received its Wells notice on Feb. 24, relating to a $1.3 billion subprime mortgage-backed securities deal in late 2006 that the bank underwrote. Goldman said it will be making a submission to the SEC related to the case and communicating with SEC staff to address their concerns. The bank has also received inquiries from governmental, regulatory bodies and self-regulatory entities concerning certain transactions Goldman entered with MF Global prior to the brokerage firm's bankruptcy filing. Goldman said it is cooperating with all such inquiries. Reuters earlier reported that Goldman purchased $1.3 billion worth of commercial paper from MF Global days before its bankruptcy on Oct. 31. Wells Fargo said its Wells notice related to its disclosures in offering documents for mortgage-backed securities. The bank said it is providing information requested by various regulatory agencies in connection with their investigations. Representatives of Goldman, Wells Fargo and the SEC declined further comment. The U.S. government is under intense pressure to show that it can hold Wall Street accountable for its contribution to the subprime housing meltdown that began in 2007. Last month, the Obama administration set up a special task force to investigate practices related to mortgage-backed securities. A settlement this month with five major banks, including Wells Fargo, over foreclosure-related abuses allows probes of mortgage bonds to go forward. Several banks, including Goldman and Wells Fargo, have already reached multi-million-dollar settlements with the SEC over crisis-era derivatives deals tied to subprime mortgages. The Wells notices detailed on Tuesday indicate the SEC is pursuing cases related to securitization of the underlying bonds as well.In January, U.S. Attorney General Eric Holder said the Justice Department issued civil subpoenas focusing on mortgage-backed securities to 11 different financial institutions. He said the department had discussed the subpoenas with the SEC and added these subpoenas did not duplicate earlier requests from that agency. Wells Fargo, the fourth-largest U.S. bank by assets, said it is also facing investigations related to home loan origination practices. San Francisco-based Wells is the largest originator of mortgages in the United States. Last week, Citigroup [C Loading... () ] said it received a subpoena from federal and state regulators seeking information about the bank's "issuing, sponsoring, or underwriting" of mortgage-backed securities. The inquiries included a subpoena from the civil division of the U.S. Department of Justice, which Citigroup received on Jan. 27, it said in its annual report. That same day Attorney General Eric Holder said the department issued civil subpoenas to 11 financial institutions as part of a new effort to investigate misconduct in the packaging and sale of home loans to investors. In its annual report filing last week, Bank of America [BAC Loading... () ] said it has "received a number of subpoenas" from regulators and other authorities about the bank's underwriting and issuance of mortgage-backed securities. Copyright 2012 Thomson Reuters. Click for restrictions.
Having reaped big gains during both of those turns, Greg Lippmann, a former star trader at Deutsche Bank, is now catching the next upswing: buying the same securities built from mortgages that he bet against before the financial crisis erupted. Mr. Lippmann is joined by other big-money investors — mutual funds like Fidelity as well as hedge funds — in riding a wave of interest in the same complex loan pools that nearly washed away the financial system. The attraction is the price. Some mortgage bonds are so cheap that even in the worst forecasts, with home prices falling as much as 10 percent and foreclosures rising, investors say they can still make money. “Given its significant underperformance in 2011, we believe the product is as cheap to broader markets as it has been in a long time,” Mr. Lippmann, whose portfolio is heavy with subprime mortgage securities, wrote in a recent letter to investors. More broadly, the nascent recovery in the mortgage bond market supports a view that the housing slump may have bottomed out. Sales of existing homes are picking up. State and federal authorities have reached a $26 billion settlement with the big banks that is expected to provide some mortgage relief. And the Federal Reserve Bank of New York has been able to auction off billions of dollars of mortgage securities that it acquired as part of the financial crisis bailouts. “There is light at the end of the tunnel,” said Kenneth J. Taubes, the head of United States investment for Pioneer Investments, a global investment manager that owns these securities. “The mortgage crisis is getting behind us, and things are getting back to some semblance of normality.” That optimism is an about-face from 2006 and 2007, when Mr. Lippmann and others told investors that housing was a bubble ready to burst. On Wall Street, Mr. Lippmann became known as “Bubble Boy,” and one of his traders wore a joking T-shirt that read, “I Shorted Your House.” His exploits were chronicled in Michael Lewis’s best seller “The Big Short,” which described him as somewhat brash and crass. He was known for maintaining a sushi spreadsheet, where he ranked the top Japanese restaurants in Manhattan on ambiance, quality and cost. (He still maintains the spreadsheet.) These days, industry competitors describe Mr. Lippmann, who runs LibreMax Capital, as a more mellow presence. And he is much more positive about the market, telling investors that his fund is reducing its hedge against a potential market crash. Through a spokesman, Mr. Lippmann declined to comment. Others in the industry are also bullish, pouring money back into mortgage securities. Trading has surged in recent weeks. Prices have risen more than 15 percent in the first two months of 2012, after dropping by as much as 40 percent last year. “There was a lot of money waiting on the sidelines because yields were starting to look very attractive,” said Jasraj Vaidya, a strategist at Barclays Capital. “Lots of it seems to have come out now.” Yet the tide could turn again and wipe out investors. Chief among the risks is Europe: the Continent’s banks still hold a significant amount of United States mortgage securities, and if they are forced to sell assets, it could wreak havoc on the market. Washington is a question mark, too. If banks have to pay for loans they issued under dubious circumstances, it would be a home run for investors, who could receive full payment for a mortgage in a security they bought at a discount. But if borrowers whose houses are worth less than their mortgages are able to reduce their principals on a large scale, bond investors could suffer because the securities would be worth even less than they paid. “As a money manager, you can’t close your eyes to that potential outcome,” said Jeffrey Gundlach, a founder of DoubleLine Capital, who has been buying mortgage securities since 2008. “To believe that this time we are really out of the woods and the prices will not drop again is dangerous. People made that argument a year ago.” The mortgage bond market is a very different creature than it was before the financial crisis. For one, it is much smaller: very few residential mortgage-backed securities have been issued since the crisis. The market, at $1.3 trillion, is half the size it was at its peak and shrinks by an estimated $10 billion every month. Despite the limited supply, prices remain cheap, in part because the assets are difficult to value. Hedge funds and big investors use computer systems to analyze the underlying loans and estimate, among other things, how many borrowers will default and how much money can be recovered in a foreclosure. Take one security, JPALT 2006-S1 1A11, which was built from Alt-A loans, or mortgages that required little documentation verifying a borrower’s income. On the surface, the numbers are not encouraging: of the 799 mortgages underpinning the bond, many in foreclosure-heavy California and Florida, about 21 percent are more than 60 days late on payments. The annual default rate is about 7 percent, and of the homes sold out of foreclosure, investors take a 54 percent hit, according to data from Bloomberg. On average, about 5 percent of the homeowners refinanced their mortgages before they were due over the last 12 months. That bond recently traded at nearly 70 cents on the dollar.