Goldman Sachs Group Inc. (GS) agreed to sell Litton Loan Servicing LP to Ocwen Financial Corp. (OCN) for $263.7 million in cash, ending the New York-based bank’s 3-1/2 year experiment in processing home-loan payments.
In addition to the cash payment, which may be adjusted at closing, Ocwen will pay about $337.4 million to retire some of Litton’s debt, according to a filing by West Palm Beach, Florida-based Ocwen. The sale of Litton comes two months after Goldman Sachs wrote down the value of the mortgage-servicing business by about $200 million.
“It really makes sense for them to sell it, and better for them to sell it sooner rather than later,” said David B. Hilder, a New York-based analyst at Susquehanna Financial Group LP who has a positive rating on Goldman Sachs. “They bought it at a time when the business was easier and it looked like there might be some insights to be gained in the mortgage market from having a servicer.”
Mortgage servicing firms send out bills, collect payments and handle foreclosures. Goldman Sachs acquired Litton, based in Houston, and 1,000 employees at a time when investors including billionaire Wilbur Ross and Centerbridge Capital Partners LLC purchased mortgage servicers to help them better understand the market, and profit from buying discounted loans. Goldman Sachs said in March that it was considering selling Litton, and a person familiar with the matter said the firm had failed to find enough distressed mortgage loans to buy.
$41.2 Billion Portfolio
Ocwen is getting a portfolio of loans with about $41.2 billion in unpaid principal balance as of March 31, most of them non-prime home mortgages, the filing said. Ocwen agreed to finance about $2.47 billion of servicing advances associated with the business, the statement said. Advances include the principal, interest, taxes and insurance remittances that servicers must make to securities trusts even when homeowners fall behind on those payments.
Goldman Sachs will remain liable for fines and penalties that could be imposed by government authorities relating to Litton’s foreclosure and servicing practices before the deal closes, the statement said, and Goldman Sachs will share some of the losses arising out of claims from third parties, such as investors and borrowers, in connection to servicing agreements.
Fines and Penalties
Litton is among the mortgage-servicing businesses cooperating with investigations by 50 state attorneys general into foreclosure practices. The probe began after authorities discovered some firms used faulty paperwork to seize homes.
The inquiries “may result in the imposition of fines or other regulatory action,” Goldman Sachs said in its quarterly regulatory filing with the U.S. Securities and Exchange Commission on May 10. “As of the date of this filing, the firm is not aware of foreclosures where the underlying foreclosure decision was not warranted.”
Litton’s value has declined since Goldman Sachs purchased it in 2007. Most of a $220 million impairment charge that Goldman Sachs took on assets held for sale in the first quarter was related to Litton, the bank said. Litton’s mortgage- servicing rights were “not material” to Goldman Sachs as of March, having dropped from $283 million at the end of February 2008, filings show.
Keeping ‘Certain Assets’
“Goldman Sachs does not expect the sale to have any material impact on earnings in the second quarter due to the combination of the sales price and the impairment charge announced in the first quarter of 2011 primarily related to Litton,” the bank said in a statement today, adding that the company plans to retain “certain assets.”
Goldman Sachs never disclosed how much it paid to acquire Litton from Credit-Based Asset Servicing and Securitization LLC, or C-Bass. Radian Group Inc. (RDN), the second-largest U.S. mortgage insurer and a part owner of C-Bass, disclosed a month before the sale was completed that the unit would be sold for about $467.9 million to an unnamed buyer.
“Dealing with individual homeowners and individual borrowers just doesn’t fit the rest of Goldman’s business,” said Susquehanna’s Hilder. “The decline in home prices overwhelmed any benefit.”
In contrast to Goldman Sachs’s falling stock price this year, Ocwen’s shares gained more than 30 percent in New York Stock Exchange composite trading through last week. The shares gained 7 cents to $12.57 as of 11:52 a.m. in New York. Goldman Sachs fell 72 cents to $134.61.
Ocwen agreed in May 2010 to buy HomEq Servicing, a mortgage-servicing business owned by London-based Barclays Plc (BARC), for about $1.3 billion in cash conditional on the value of certain assets at completion, according to a statement from Barclays at the time. Barclays also agreed to provide Ocwen with about $1 billion in secured financing in connection with the deal and offered assistance in raising more funds, the statement said.
Barclays advised Ocwen on the purchase of Litton and is one of the lenders, along with Bank of America Corp. (BAC) and Royal Bank of Scotland Plc, providing Ocwen’s new facility to finance Litton’s servicing advances. Ocwen has also received a commitment letter from Barclays to provide a senior secured term loan facility of $575 million to finance the transaction, the filing said.
Before buying Litton, Goldman Sachs had tried to avoid businesses that involved the mass-market or retail customer. David Viniar, Goldman Sachs’s chief financial officer, told analysts in September 2006, more than a year before the company bought Litton, that the firm was reluctant to buy a lender because of the “retail concern.”
“Goldman Sachs is largely an institutional business,” Viniar said at the time. “There are different risks when you’re touching the retail customer.”
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