Photo: Wikimedia Commons
Goldman is reportedly considering selling its loan servicing unit.Litton Loan Servicing, which Goldman bought in 2007, has been a headache for at least a year, in one instance because people complained about the ethics of unit’s business practices.
Obviously the housing crisis has made the business unattractive.
And foreclosing on a property isn’t profitable (it’s expensive; banks don’t want to foreclose), so Litton’s owners would presumably hope to delay the process as long as possible and try to help the owners stay in the property and continue paying, possibly by modifying the mortgage.
Litton seems to have been in this stage as recently as October, when Goldman’s Litton unit suspended foreclosures. Later in October, Goldman’s David Viniar announced that Litton still had 23,000 foreclosures hanging in suspension.
The reason Goldman seems to be selling now might have something to do with the fact that, according to the WSJ –
Investors in securities backed by mortgages have also threatened to demand that banks buy back their bonds, citing bad underwriting.
Litton collects loan payments and works with troubled borrowers on behalf of the investors who own the securities backed by the loans, so there’s an interesting issue underlying the timing.
The investors who own the securities backed by the loans, of course, want their investment to pay off; they want the borrowers to pay their mortgage. Obviously, they fear that the borrowers simply won’t be able to pay, so they’ve threatened to sue the banks that securitized the loans to try and recoup some of the losses on their investment.
So it’s no wonder Goldman wants to get rid of it, as 1) it’s losing money and 2) it’s likely to not stop.
But one question is how much Goldman could make off a sale now that Obama is pushing an agenda that would kill some of what little it has left of potential value.
Some of the factors affecting the price of the sale:
- Litigation costs: Any sale of Litton would include negotiations about potential litigation costs, a person familiar with the matter said, according to the WSJ. Litton has received ~800 complaints in the past three years, so this could be a big one.
- A new law. The Obama administration’s new initiative to force firms to reduce monthly payments for homeowners, if it extends to Litton, could cost the loan servicing unit because it would be collecting less in monthly payments from homeowners.
It has something to do with the Obama administration’s new initiative to force Bank of America, JPMorgan, Citi, Wells Fargo and Ally Financial (which handle three out of every five home loans) “to reduce monthly payments for as many as three million distressed homeowners in as little as six months,” according to the Huffington Post.
The government’s plan is beneficent — reduce mortgage payments or at least lower balances for the 4.7 million delinquent homeowners throughout the country, who have narrowly managed to avoid foreclosure so far — but of course it’s costly to the banks that issued the loans, which will likely have at least a residual effect on the loan servicing units that collect loan payments from borrowers, like Litton (although they don’t make it known).
If Obama pushes through his plan, Litton’s revenues could drop because they’ll be getting fewer in loan payments from borrowers.