DEALTALK-Goldman Sachs could find Litton sale tough

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* Few buyers left for these assets

* Litton could be worth $500 million–banker

* Business could carry higher costs, litigation risk

By Paritosh Bansal and Dan Wilchins

NEW YORK, Dec 6 (BestGrowthStock) – Goldman Sachs Group Inc (GS.N: )
is only the latest bank to look at selling its mortgage
servicing business, and if history is any guide, it will not be
an easy process, experts said.

The investment bank is asking potential buyers if they are
interested in buying Litton Loan Servicing, a company that
collects subprime mortgage payments from homeowners and
forecloses on delinquent borrowers, a source familiar with the
situation said.

Many potential buyers are likely to be spooked by the
rising costs in the servicing business, further limiting the
small pool of acquirers, bankers said. Still, experts say a
deal is possible for Litton.

Goldman has owned the business since 2007, when according
to published reports it paid around $470 million to buy it from
Credit-Based Asset Servicing and Securitization LLC. C-Bass, a
pioneer in the packaging of subprime mortgages into bonds that
investors could buy, filed for bankruptcy protection in
November.

A source familiar with the business estimated the Litton
business could now fetch at least as much as Goldman originally
paid.

Banks often bought these kinds of businesses in part
because they could give an informational edge for mortgage bond
trading, according to bankers that helped their institutions
evaluate these deals.

The businesses can also generate solid cash flow, and can
perform particularly well when interest rates are rising, an
environment that can hurt other investment banking businesses
like bond trading.

But the expected profits from the servicing business have
fallen as a mortgage crisis has turned into a foreclosure
crisis, bankers and analysts said. There could be unexpected
legal liability associated with foreclosing, and when a loan
goes bad, servicers often have to advance money to investors in
the bonds that funded the mortgage until the actual
repossession happens.

New regulations require banks to support their mortgage
servicing operations with more capital, which also weighs on
potential profits for the business.

“It’s not a main business for Goldman Sachs, and it’s not
coming back,” said Brad Hintz, an analyst covering investment
banks at Sanford C. Bernstein.

These difficulties may explain why so many of Goldman
Sachs’ competitors have exited the business. But the problems
that Goldman is running into could also be concerns for
potential buyers, which could limit demand.

PAYS TO BE BIG

Goldman is relatively small in the subprime mortgage
servicing business. It pays to be big in the servicing
business, because larger companies have relatively lower costs,
an industry source said.

Some big commercial banks have large servicing operations,
but these companies are not usually interested in taking on
more assets now.

The most likely bidders for Litton are large standalone
mortgage servicing businesses, like Ocwen Financial Corp.
(OCN.N: ), Fortress Investment Group’s (FIG.N: ) Nationstar
Mortgage and Wilbur Ross’ American Home Mortgage Servicing, the
source said.

Representatives for Ocwen and Fortress declined to comment.
Wilbur Ross did not reply to an email Friday seeking a
comment.

Other banks have had success selling or trimming down
servicing assets. In May, Morgan Stanley’s (MS.N: ) Saxon
Mortgage Services sold $6.9 billion servicing portfolio to
Ocwen Financial Corp. Ocwen also bought Barclays (BARC.L: ) U.S.
mortgage servicing business HomEq for $1.3 billion that month.

In October 2009, IBM (IBM.N: ) agreed to buy the core
operating assets of a Bank of America Corp (BAC.N: ) mortgage
servicing unit, Wilshire Credit Corp.

But it was not clear how much demand there is for
additional servicing assets.

One servicer that had been buying assets is now up for sale
itself: private equity firm Centerbridge Partners is selling
its Green Tree Servicing business. The books on the unit are
out and bids are expected later this month, the source said.

Centerbridge declined to comment.

GMAC’s Residential Capital considered selling its mortgage
servicing business, but after an extensive sales process
decided it was not happy with the prices that buyers were
willing to pay.

ResCap drew final bids Centerbridge, Fortress and Ocwen,
sources have said, which shows how small the pool of potential
buyers is for such assets.

Litton’s valuation is based on its having roughly $50
billion of home loans to collect payments on. Those servicing
rights are usually worth around half a percentage point of the
value of the loans, or around $250 million, the source familiar
with the Litton business said.

Additional assets like equity value and paybacks on funds
advanced to mortgage investors could bring the total value of
the business to closer to $500 million, he added.
(Reporting by Paritosh Bansal and Dan Wilchins; editing by
Gunna Dickson)

DEALTALK-Goldman Sachs could find Litton sale tough