On Monday, The Goldman Sachs Group Inc. (GS) announced the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen Financial Corp. (OCN) for about $263.7 million. Some of the assets of Litton will be retained by Goldman, which is not reflected in the sale price. The sell off follows the writing down of mortgage-servicing business worth $200 million by Goldman two months ago.
As per the terms of the deal, Ocwen will enter a new $2.47 billion loan for servicing advances and pay $337.4 million to retire a part of its debt, which Litton owes to Goldman. Further, Ocwen would receive $575 million of senior secured loan from Barclays plc (BCS) in order to finance the deal.
Additionally, the transaction will provide Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance primarily related to non-prime residential mortgage loans. Moreover, it would provide the company with the servicing platforms based in Houston and Dallas in Texas.
Previously, in March, The New York Times 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. These inquiries are expected to result in the imposition of fines or other regulatory actions. Goldman has agreed to pay fines imposed by government for any of Litton’s business operations that occurred before the deal.
Houston-based Litton is among the mortgage-servicing businesses, which are cooperating with investigations carried out by 50 state attorneys general for foreclosure practices. The survey began after authorities discovered that some firms are using flawed paperwork to confiscate homes.
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.
Litton 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 halt 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.
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.
Goldman does not expect the sale to have any substantial impact on earnings in the second quarter of 2011 due to the combination of the sales price and the impairment losses recorded primarily related to Litton. The acquisition is expected to close in the late third quarter or early fourth quarter of 2011.
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). Ocwen acquires servicing rights by buying them from the owners of mortgage pools and also by being contracted as a servicer. Therefore, with the ongoing deterioration of home prices, the company might get more opportunities to acquire distressed servicing portfolios at low prices.
Mortgage servicing rights includes the business of collecting problem loans. Moreover, Goldman will continue to finance servicing advances, which includes servicing units advance to investors at the time of delays in payments from borrowers till the transaction gets completed.
Once the deal closes, Goldman can either continue financing these advances alone or finance advances as a part of a group, which includes other three banks- Royal Bank of Scotland (RBS), Barclays and Bank of America.
After selling off Litton, Goldman 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.
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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