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Goldman Sachs Goes on a Mortgage-Buying Binge

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Goldman Sachs Goes on a Mortgage-Buying Binge

Last update: 16/03/2017 2:30:00 am

By Liz Hoffman and Serena Ng

Goldman Sachs Group Inc. has become the largest buyer of severely delinquent home loans from mortgage giant Fannie Mae over the past year and a half, acquiring nearly two-thirds of $9.6 billion in loans the agency has auctioned, government records show.

On Tuesday Goldman won the majority of loans at Fannie's latest auction, its largest to date. The bank bought about 8,000 loans with unpaid balances of $1.4 billion.

The Wall Street giant's loan-buying spree is one strange reverberation of the housing crisis. In ramping up a mortgage-buying operation that had lain low since the meltdown, Goldman is trying to make money even as it looks to fulfill terms of a government settlement that calls for it to help struggling homeowners.

Goldman was among the last of the big U.S. banks to agree to pay billions of dollars to federal and state governments for their roles packaging and selling securities in the mortgage meltdown. Its $5.1 billion pact, reached in April 2016, included $3.3 billion in fines and $1.8 billion in "consumer relief."

That relief can include forgiving loan balances for struggling homeowners. To count toward Goldman's $1.8 billion settlement obligation, the bank must make modifications to get the loan's principal amount owed to be equal to or less than the value of the home itself.

Other banks can meet similar obligations by working through their own portfolio of loans or coordinating with their mortgage-servicing arms, which provide access to struggling homeowners.

Goldman's problem: It wasn't a big originator of home loans, and sold its mortgage-servicer in 2011. Without a ready supply of mortgages, the bank has gone into the market with the goal of restructuring the loans to receive credit under the settlement, according to people familiar with its purchases.

That relief reduced the amount of cash Goldman has to pay directly to the government. And the modifications can prove less costly to the firm over time. After borrowers resume monthly payments, the bank hopes to sell the loans at a profit, the people said. In some cases, though, Goldman is quickly recouping money by foreclosing on homes and selling them, government records show.

"They are back in business," Chris Wyatt, a former executive at a Goldman-owned mortgage servicing business, said of the bank's loan-buying. Today an adviser to homeowners facing foreclosure, Mr. Wyatt has researched loan sales. Goldman's "appetite has gone up dramatically," he said.

In all, Goldman has spent roughly $4.5 billion on some 26,000 Fannie-owned loans, according to the government records. It has also been buying mortgages, in smaller size, from private sellers and Freddie Mac, Fannie's sister agency, according to county records, government filings and traders.

In 2015, Fannie and Freddie began auctioning off delinquent, or "non-performing," mortgages in batches. Most had been written in the years leading up to the crisis, when home values soared and lending standards slipped. Some had gone unpaid for as long as six years, according to public documents on the loans.

Selling the loans, often at a significant discount to their face value, has helped Fannie and Freddie recoup some losses while leaving the tedious task of restructuring the loans to others.

Since October 2015, Goldman has bought 59% of the mortgages auctioned by Fannie Mae, representing unpaid loan balances of $5.7 billion, a Wall Street Journal review of government records shows. It has nearly swept the last two auctions, held in October and earlier this month, acquiring 15,000 individual loans representing $2.8 billion in unpaid balances.

Because Goldman is getting credit toward fulfilling the terms of its settlement, it can afford to pay more, according to people familiar with the process. Its aggressive bidding has raised eyebrows among competitors and was much talked about on the sidelines of a recent securtization-industry conference in Las Vegas, according to attendees.

Goldman has paid between 50 and 90 cents on the dollar for the loans, according to Fannie Mae records. A steady rise in home prices has increased the cost of buying delinquent loans in recent years -- but also the potential profit if Goldman can resell them or foreclose on the property.

The bank has made most of its purchases through a subsidiary called MTGLQ Investors LP, government records show. Shorthand for "mortgage liquidation" and nominally based at a suburban Dallas office park, MTGLQ has been used by Goldman since the early 1990s to trade credit.

Goldman is buying the delinquent loans with an eye toward restructuring them by reducing interest rates, lengthening the term of the loan, or forgiving some of the debt outright, according to people familiar with the purchases.

The bank's immediate goal is to get credit for the settlement, though the longer-term goal is to make money over time, the people said. That can happen by the firm collecting mortgage payments if it gets borrowers back on track, or by selling the loans once the borrowers are up-to-date again.

The process of modifying a loan and getting a borrower on track and then selling a loan can take one to two years. Buyers can make between five and 15 cents on the dollar above what they originally paid, said Sandeep Bordia, head of research at Amherst Capital Management LLC, a $7 billion investment firm that buys soured mortgages. Loans that are up-to-date on payments fetch far higher prices than those that are behind, he said.

"Buying non-performing loans and modifying them is a profitable business, " said Laurie Goodman, co-director of the Housing Finance Policy Center at Urban Institute, a Washington, D.C.-based think tank.

Goldman has given few homeowners a break and has foreclosed on many of the loans it has acquired, property and court records show. Last year, the bank modified 100 home loans in a pilot program to test its selection and modification process, according to Eric Green, an independent monitor appointed to oversee Goldman's government-mortgage settlement. It sought $2 million in credit toward its settlement.

The bank expects to ramp up modifications as it works through more recent Fannie Mae loans, whose borrowers are on better financial footing, a person familiar with the matter said.

Write to Liz Hoffman at liz.hoffman@wsj.com and Serena Ng at serena.ng@wsj.com

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