Photographer: F. Carter Smith

Goldman Veteran Said to Buy Mortgages After Big Short

Dan Sparks helped Goldman Sachs Group Inc. profit from its bets against subprime mortgages. Now he’s expanding credit to Americans hurt when those types of loans soured and the housing market collapsed.

Sparks’s SG Capital Partners this year began buying home loans made through origination partners across the U.S., with a focus on mortgages without government backing, said two people with knowledge of the business who asked not to be identified because the information is private. Mortgages that don’t qualify for purchase by government agencies include large-balance jumbo loans and those to borrowers with lower credit scores or higher debt.

Investors are seeking to re-establish the market for riskier mortgages to bundle them into bonds, a business that’s almost vanished since the crash. In search of the greater returns associated with such loans, hedge funds, mortgage real estate investment trusts and money managers are trying to reach people who’ve been unable to buy homes since traditional lenders tightened their standards.

“Lending has yet to restart to meet home borrowers’ needs and support a broader housing market with more private investment,” Ying Shen, a New York-based analyst at Deutsche Bank AG, said in an e-mail. “There is tremendous growth in the market for loans not backed by the government, given the demand for mortgage credit and demand from investors for higher-yielding mortgage-backed securities.”

Sparks, 47, formed SG Capital in 2013 with fellow Goldman Sachs alumni Kevin Gasvoda and Justin Mahoney. The firm last year was hiring a team and building its two businesses -- the mortgage-finance company and an investment-manager, which is already running a large separate account for a client, according to the people.

Ira Ellison, an analyst for the Stamford, Connecticut-based firm, declined to comment on its investments.

After Foreclosure

The firm’s partners are offering jumbo mortgages with loan amounts as high as $3 million, credit for rental-home investors, debt to foreign nationals, and mortgages for borrowers who went through a foreclosure or bankruptcy “but have re-established credit and are ready to buy a home,” according to the website.

Sparks spent 19 years in Goldman Sachs’s fixed-income division, and was a partner from 2002 to 2008. Gasvoda joined the bank’s mortgage business in 1997, and ran the credit loan trading business from 2002 to 2007, serving as a partner and advisory director. Mahoney started at the mortgage business in 2002 and held a variety of positions until 2013, including co-head of the residential loan trading desk.

‘Big Short’

In 2006 and 2007, Sparks ran the mortgage business, which under his leadership shifted its bets on housing debt and built a position that David Viniar, Goldman Sachs’s chief financial officer at the time, called “the big short,” a $13.9 billion wager against subprime mortgage-related securities, according to a report by the U.S. Senate Permanent Subcommittee on Investigations.

The business made $1.2 billion in net revenue for Goldman Sachs in 2007 by shorting subprime bonds, a position Chief Executive Officer Lloyd Blankfein described as a “hedge” against its holdings of other home-loan securities. Going short helped make Goldman Sachs Wall Street’s most profitable firm, while many of its clients lost money, according to the Senate report.

More than $2 trillion of securities backed by the riskiest subprime and Alt-A mortgages were issued from 2005 to 2007, according to newsletter Inside Mortgage Finance. Losses on loans tied to bonds from that time so far have reached 30 percent for subprime deals and 20 percent for Alt-A, debt issued to borrowers who were self-employed or had limited documentation, according to a Jan. 6 report by Fitch Ratings.

Riskier Borrowers

Many investors seeking to finance loans to Americans shut out of the housing recovery are proceeding with caution, targeting borrowers with strong credit who may not qualify for conventional loans if they’re self-employed. Some firms are planning to retain more risk in the deals rather than transferring it to others, a less-common practice before the crash.

Issuance of mortgages without government backing totaled $176 billion in the first nine months of last year, mostly jumbo loans to borrowers with prime credit, according to Inside Mortgage Finance.

It may prove difficult to find non-prime borrowers, or those with lower credit scores, who also have the capital to make down payments and the income necessary for the higher interest rates they’re being offered, said Harrison Choi, co-head of securitized products at Los Angeles-based TCW Group Inc.

“There are definitely a lot of interesting and attractive opportunities within the non-prime loan space,” Choi said in an e-mail. “The biggest question is, how much volume is really going through, and how much is really out there?”

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