Goldman Sachs could find Litton sale tough

By Paritosh Bansal and Dan Wilchins

NEW YORK (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.


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)

Goldman Sachs could find Litton sale tough