Financial Times reported that The Goldman Sachs Group Inc. (GS) is planning to close down the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen Financial Corp. (OCN). The news followed the writing down of mortgage-servicing business worth $200 million by Goldman two months ago.
In March, New York Times also reported that Goldman was looking for strategic options for the sale of Litton as the mortgage-servicing industry was under greater scrutiny for their foreclosure practices. According to sources, the sale of the unit to Florida-based mortgage servicer, Ocwen is expected to be commenced within few days.
No expected financial terms were disclosed. However, in May, Reuters reported that Goldman’s planned sale of Litton is expected at a price of $500 million.
During the first quarter of 2011, Goldman reported $220 million in impairment losses and reclassified assets as held for sale, primarily related to Litton Loan Servicing. Further, the company stated it planned to sell the transferred assets within 12 months.
Houston-based Litton is among the mortgage-servicing businesses, which are cooperating with investigations by 50 state attorneys general for foreclosure practices. The survey began after authorities discovered that some firms are using flawed paperwork to confiscate homes. These inquiries may result in the imposition of fines or other regulatory action.
Many large U.S. mortgage servicers including JPMorgan Chase & Co (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC) and Citigroup Inc. (C) received a document proposing changes in foreclosure policies from state attorneys general (AGs) and federal regulators.
The document has been designed to lay the groundwork for certain permanent changes in mortgage servicing practices and summarizes a mandatory code of conduct. The proposal has been backed by the Justice Department, the U.S. Housing and Urban Development Department, the Federal Trade Commission and Treasury Department. This, however, is not part of any settlement deal related to financial penalties, which regulators are supposedly working on.
The unit was acquired in 2007 for $428 million from Credit-Based Asset Servicing and Securitization LLC, known as C-BASS, a subprime mortgage investment firm. Besides, Goldman also agreed to repay more than $916 million of Litton’s debt.
The acquisition was a part of the strategy to acquire troubled mortgages at attractive prices and restructure the debts. Unfortunately, the strategy failed for Goldman as some distressed loans came up for sale than expected and prices were still higher.
Further, the financial crisis hit the servicing businesses due to the rapid growth of foreclosures while boosting costs. Goldman is selling the unit as it failed to find opportunities of buying distressed mortgage loans.
Foreclosures at Litton came to a stop in October when criticism over documentation by the loan-servicing industry cropped up. Lenders were being condemned for their action to evict delinquent borrowers, in spite of incomplete paperwork related to foreclosures.
If Goldman succeeds in selling off Litton, the company will be able to reduce costs related to foreclosures and will be subsidized from mortgage mess to a certain extent. Further, Litton’s sale will bring an end to business, which involved dealing customers on a daily basis. Besides, Goldman will be able to prioritize high-valued investors that make up most of the bank’s business.
Ocwen is particular in servicing subprime mortgage loans, which were generally made to borrowers, who do not meet the requirements of Fannie Mae (FNMA) and Freddie Mac (FMCC). The company acquires servicing rights by buying them from the owners of mortgage pools and also by being contracted as a servicer.
With ongoing reports of deteriorating home prices, Ocwen might get even more opportunities to choose distressed servicing portfolios at low prices.
Goldman currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.
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