Example of a Structured Subprime Mortgage Investment

                                                          ($1,457 MM Approximately)

     (a previously referenced investment dated 4/2/07 is no longer in the SEC’s database)     

 

Our observant readers will note that this investment is very complicated; it is impossible to analyze the constituent subprime mortgages, other than to note that lower credit score loans have slightly higher stated collateral coverages. What is most relevant in a loan, however, is its cash flow coverage *. Collateral is only the last source of repayment.

Almost all tranches of this trust were highly rated by S&P and Moody’s. The fixed rate tranches carry a weighted average net coupon (we think) of around 6.4%. Our immediate reaction is, all that risk and trouble; the prospectus supplement is 132 pages. To be very kind, this investment is murky. It is obvious why the entire financial system has to write these down. 

We suggest that you do not click on this link because the download time will probably seize up your computer, even with fast Internet. The very patient and very curious will see how complicated a CDO can be.

 

* The subsequent history of subprime loan payments bears this point out. According to a 4/28/08 CNN report, “ ‘[lenders] used FICO scores as a huge determinant for [loan] performance, but it doesn’t always work that way.’…underwriters failed to take other risk factors into account, such as income, the down payment, and total household debts.” To mention the obvious.

We also think that there is another factor at work. The 4/30/08 CS Monitor reports, “In the euphoria of a boom, professionals successfully reap big profits, but they also tend to commit lapses that set the stage for a bust. They forget basic principles or push into new activities they don’t comprehend.”

Traditional lending is a personal business, where it is necessary to: 1) know your borrower, 2) know the purpose of the loan, 3) make sure (in the case of a term loan) that adequate cash flow margins of safety exist and that there are alternate sources of repayment. As prior finance crises attest, it is possible for make mistakes by ignoring these principles or being erratic about them; but they are good guides to making sound loans.

Modern finance, on the other hand, is atomic finance, decomposing diverse assets into elementary puts and calls and then reassembling them according to the very complex formulas of stochastic calculus, understandable only by PhDs in financial economics. The advantage is that everything can be analyzed in terms of a single value-at-risk model. The disadvantage is that the principles for making sound loans can be submerged in the math. Then, those essentially Gaussian formulas will work until they don’t. Financial enterprises are now paying a very high price for relying on an inappropriate statistical model that does not reflect the uncertainties of the real world.

                                                                        __

                                                

 The information in this prospectus supplement and the attached prospectus is not complete and may be changed. This prospectus supplement and the attached prospectus are not an offer to sell these securities and they are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

 

Subject to Completion, Dated April 25, 2007

 

Prospectus Supplement to Prospectus Dated February 13, 2007

$1,457,687,600

(Approximate)(1)

Asset-Backed Certificates, Series 2007-5

Group I Offered Certificates

 

Class 1AV1, Class 1AF2A, Class 1AF2B, Class 1AF3A, Class 1AF3B, Class 1AF4A, Class 1AF4B, Class 1AF5A, Class 1AF5B, Class 1AF6, Class 1AF7A, Class 1AF7B, Class 1M1, Class 1M2, Class 1M3, Class 1M4, Class 1M5, Class 1M6, Class 1B1, Class 1B2, Class 1B3, Class 1R, Class 1RC and Class 1RX

 

Group II Offered Certificates

 

Class 2A1A, Class 2A1B, Class 2A2A, Class 2A2B, Class 2A3A, Class 2A3B, Class 2M1, Class 2M2, Class 2M3, Class 2M4, Class 2M5, Class 2M6, Class 2B1, Class 2B2, Class 2B3, Class 2R, Class 2RC and Class 2RX

 

GSAA Home Equity Trust 2007-5

Issuing Entity

 

GS Mortgage Securities Corp.

Depositor

 

Goldman Sachs Mortgage Company

Sponsor

 

Wells Fargo Bank, National Association

Master Servicer and Securities Administrator

 

Avelo Mortgage, L.L.C.

Countrywide Home Loan Servicing LP

GreenPoint Mortgage Funding, Inc.

Servicers

    

 

 

Consider carefully the Risk Factors beginning on page S-33 in this prospectus supplement and page 2 in the accompanying prospectus.

 

The certificates will represent interests in GSAA Home Equity Trust 2007-5 and will not represent interests in or obligations of the depositor, the underwriter, the master servicer, the sponsor, the securities administrator, the servicers, the responsible parties, the trustee or any of their respective affiliates.

 

This prospectus supplement may be used to offer and sell the offered certificates only if accompanied by the prospectus.

 

Each class of certificates will receive monthly distributions of interest and/or principal, commencing on May 25, 2007, or if such date is not a Business Day, the Business Day immediately following such date.

 

Assets of the Issuing Entity—

 

·  With respect to the group I certificates, a loan group consisting of fixed-rate Alt-A type mortgage loans and, with respect to the group II certificates, a loan group consisting of adjustable-rate Alt-A type mortgage loans, in each case secured by first lien mortgages or deeds of trust on residential real estate properties.

 

Credit Enhancement—

 

·  Subordination of the subordinate certificates to the senior certificates of the same group as described in this prospectus supplement under “Description of the Certificates—Distributions of Interest and Principal”;

 

·  Excess interest and overcollateralization as described in this prospectus supplement under “Description of the Certificates—Overcollateralization Provisions”;

 

·  Cash flow and enhancement features relating to a certificate group will benefit that group only and not the other certificate group.

 

Interest Rate Protection—

 

·  For the group II certificates only, an interest rate swap agreement with an initial notional amount of approximately $1,104,259,000 as described in this prospectus supplement under “Description of the Certificates—Interest Rate Swap Agreement”.

 

Goldman, Sachs & Co., the underwriter, will offer the offered certificates from time to time in negotiated transactions or otherwise at varying prices to be determined at the time of sale plus accrued interest, if any, from the closing date. The proceeds to GS Mortgage Securities Corp. from the sale of the offered certificates (excluding accrued interest) will be approximately [·]% of the class principal balance of the offered certificates before deducting expenses. The underwriter’s commission will be the difference between the price it pays to GS Mortgage Securities Corp. for the offered certificates and the amount it receives from the sale of the offered certificates to the public.

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. GS MORTGAGE SECURITIES CORP. WILL NOT LIST THE OFFERED CERTIFICATES ON ANY SECURITIES EXCHANGE OR ON ANY AUTOMATED QUOTATION SYSTEM OF ANY SECURITIES ADMINISTRATION.

 

Goldman, Sachs & Co.

The date of this prospectus supplement is April [•], 2007.

 

 

Group I Offered Certificates

 

 

Class

 

Approximate

Initial Principal

Balance(1)

 

Initial

Pass-Through

Rate

 

Type

 

Ratings

(S&P/Moody’s)

 

1AV1

 

$

135,369,000

 

 

Variable(2)

 

 

Senior

 

 

AAA/Aaa

 

1AF2A

 

$

24,180,000

 

 

Fixed(3)

 

 

Senior

 

 

AAA/Aaa

 

1AF2B

 

$

2,687,000

 

 

Fixed(4)

 

 

Senior

 

 

AAA/Aaa

 

1AF3A

 

$

36,764,000

 

 

Fixed(5)

 

 

Senior

 

 

AAA/Aaa

 

1AF3B

 

$

9,191,000

 

 

Fixed(6)

 

 

Senior

 

 

AAA/Aaa

 

1AF4A

 

$

45,076,000

 

 

Fixed(7)

 

 

Senior

 

 

AAA/Aaa

 

1AF4B

 

$

5,009,000

 

 

Fixed(8)

 

 

Senior

 

 

AAA/Aaa

 

1AF5A

 

$

22,183,000

 

 

Fixed(9)

 

 

Senior

 

 

AAA/Aaa

 

1AF5B

 

$

2,465,000

 

 

Fixed(10)

 

 

Senior

 

 

AAA/Aaa

 

1AF6

 

$

8,000,000

 

 

Fixed(11)

 

 

Senior

 

 

AAA/Aaa

 

1AF7A

 

$

18,748,000

 

 

Fixed(12)

 

 

Senior

 

 

AAA/Aaa

 

1AF7B

 

$

4,688,000

 

 

Fixed(13)

 

 

Senior

 

 

AAA/Aaa

 

1M1

 

$

5,905,000

 

 

Fixed(14)

 

 

Subordinate

 

 

AA+/Aa1

 

1M2

 

$

3,038,000

 

 

Fixed(15)

 

 

Subordinate

 

 

AA/Aa2

 

1M3

 

$

2,023,000

 

 

Fixed(16)

 

 

Subordinate

 

 

AA/Aa3

 

1M4

 

$

1,686,000

 

 

Fixed(17)

 

 

Subordinate

 

 

AA/A1

 

1M5

 

$

1,182,000

 

 

Fixed(18)

 

 

Subordinate

 

 

AA-/A2

 

1M6

 

$

1,182,000

 

 

Fixed(19)

 

 

Subordinate

 

 

A+/A3

 

1B1

 

$

1,182,000

 

 

Fixed(20)

 

 

Subordinate

 

 

A/Baa1

 

1B2

 

$

1,182,000

 

 

Fixed(21)

 

 

Subordinate

 

 

A-/Baa2

 

1B3

 

$

1,688,000

 

 

Fixed(22)

 

 

Subordinate

 

 

BBB+/Baa3

 

1R

 

$

100

 

 

N/A(23)

 

 

Senior/Residual

 

 

AAA/NR

 

1RC

 

$

100

 

 

N/A(23)

 

 

Senior/Residual

 

 

AAA/NR

 

1RX

 

$

100

 

 

N/A(23)

 

 

Senior/Residual

 

 

AAA/NR

 

 

(1)  

Subject to a variance of +/- 10%.

 

… etc.

The following charts summarize GSMC’s maximum loan-to-value ratio requirements under its various documentation programs:

 

Full Documentation

 

 

Owner Occupied

2nd Home

Non-Owner Occupied

Minimum

FICO Score

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum
LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

700

100%

100%

95%

95%

90%

90%

680

100

100

95

95

90

90

640

100

100

90

90

90

90

620

100

100

90

90

85

90

600

100

100

90

90

85

90

580

90

95

90

90

80

90

560

90

95

85

90

75

90

540

85

95

n/a

n/a

n/a

n/a

 

(1)

The maximum permitted loan-to-value ratio and combined loan-to-value ratio may be reduced for: cash out refinances and debt consolidations, certain property types, and loan amount.

 

Reduced Documentation

 

 

Owner Occupied

2nd Home

Non-Owner Occupied

Minimum

FICO Score

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

700

100%

100%

95%

95%

85%

90%

680

100

100

90

90

85

90

640

100

100

90

90

80

90

620

95

95

85

90

75

90

600

90

90

85

90

75

90

580

90

90

80

90

75

90

560

85

90

80

80

75

90

540

80

90

n/a

n/a

n/a

n/a

 

(1)

The maximum permitted loan-to-value ratio and combined loan-to-value ratio may be reduced for: cash out refinances and debt consolidations, certain property types, and loan amount.

 

31

 

Stated Income / Stated Income Stated Asset Documentation

 

 

Owner Occupied

2nd Home

Non-Owner Occupied

Minimum

FICO Score

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

700

100%

100%

90%

90%

85%

90%

680

100

100

90

90

80

90

640

90

100

85

90

80

90

620

85

90

80

90

75

90

600

85

90

80

90

70

90

580

80

90

75

90

70

90

560

75

90

65

90

60

90

 

(1)

The maximum permitted loan-to-value ratio and combined loan-to-value ratio may be reduced for: cash out refinances and debt consolidations, certain property types, and loan amount.

 

No Documentation

 

 

Owner Occupied

2nd Home

Non-Owner Occupied

Minimum

FICO Score

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

Maximum

LTV(1)

Maximum

CLTV(1)

700

95%

95%

85%

85%

80%

80%

680

90

90

85

85

75

75

660

85

85

80

80

70

70

 

(1)

The maximum permitted loan-to-value ratio and combined loan-to-value ratio may be reduced for: cash out refinances and debt consolidations, certain property types, and loan amount.

 

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.