THE COST OF DOING (SERVICING) BUSINESS – LITTON ON THE ROPES

From a report today in HousingWire, Goldman Sachs acknowledged a $220M expense in the first quarter of 2011 relating mostly to its operations of its mortgage servicing arm, Litton Loan Services. Such a huge wallop to earnings means that the attempt by Goldman to manage cash-flow of securitization structures through the servicing of the loans has not played out as well as expected. Remember, Goldman got into servicing back in 2007 when it purchased Litton from C-BASS.

In the game of servicing, it is all about cost containment. Generally, servicers are allowed to make 25bps on each loan it services for the securitization trust, where a majority of the loans are actually owned. From this fee, servicers are expected to send statements, follow-up on lagging payments and manage the loss mitigation (modifications, short sales, deed-in-lieu, etc.), foreclosure and subsequent REO acquisition and sale. In certain situations, that fee can be extending to include up to 50 bps for “special servicing.”  But in either case, the ability to make money in the servicing game is solely based upon keeping the costs associated with these services to the securitization trust at a minimum. This is why the servicing shops ran into the problem with robo-signing, sewer service and pushing for the “rocket-docket” in Florida.

Now, the servicing shops are facing new, costly, regulatory compliance requirements. The OCC and OTS, with the backing of the Federal Reserve, have gotten the major mortgage servicers to executed Consent Orders this past week, requiring that they clean up their foreclosure practices. This will add another layer of cost to an already thinly stretched bottom line to servicers.  Fortunately for Goldman and Litton, they were not part of this regulatory round-up. However, there is still the 50 state Attorneys General action that has still yet to be flushed out, which will probably cover Litton’s practices.

Add to this the ever looming requirement that servicers advance delinquent payments of interest and principal to securitization investors and you can see why Goldman is looking to pull its chute and bail from the mortgage servicing business.

What is interesting to see is the players expressing interest in the Litton servicing portfolio. Ocwen Financial, which recently just digested HomEq Servicing, has expressed interest. Homeq was originally the servicing platform for The Money Store and started its independent life following the acquisition of The Money Store by First Union/Wachoiva. Wachovia subsequently sold HomEq to Barclays, which then sold it to Ocwen. The other player presumably expressing interest in the platform or its servicing rights is Carrington Mortgage Services, which is made up of mostly ex-Fremont Investment & Loan servicing employees, especially in senior management.

So, with Goldman looking to say “adieu” to residential mortgage servicing, clearly it is time to rethink what  is the benefit to collecting payments in an industry overwhelmed with problems. Because, as the preeminent negotiators on Wall Street, Goldman always does what is best for Goldman. All that otherwise can be said is  “Caveat Emptor”!