Goldman's buying of delinquent mortgages not without risk
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Goldman Sachs has launched an ambitious program to buy severely delinquent or nonperforming home mortgages as one element of a $5.1-billion settlement it has entered into with the federal government for its role in creating and selling mortgage-backed securities (MBS) in the years leading up to the financial crisis.

According to a Wall Street Journal article, Goldman has spent $4.5 billion to acquire 26,000 delinquent mortgages from Fannie Mae. Goldman did not originate any of these mortgages. It also has purchased similar troubled mortgages from Freddie Mac and private sellers.

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Goldman intends to restructure the mortgages it has purchased with the expectation that the homeowners will then become current in making payments on them.  In accordance with its settlement agreement, Goldman will provide $1.8 billion of relief to homeowners, presumably by a combination of writing down principal balances, lowering interest rates on the mortgages and extending the repayment period.

 

Mortgages that have been successfully restructured, with homeowners current on making their mortgage payments, could then be sold to investors, most likely through newly created MBS. Goldman might even be able to sell some of those mortgages for more than their face value, thereby generating a profit that would reduce the cost of its settlement with the government.

Restructuring delinquent mortgages is not without its risks, though, as Goldman undoubtedly appreciates, for not all home mortgages can be successfully restructured. 

For starters, the amount of assistance that a delinquent homeowner may need is not readily apparent at the start of the structuring process given life’s vicissitudes for already struggling homeowners. Additionally, the administrative cost of restructuring mortgages is not cheap. 

Goldman also faces all the usual regulatory risks associated with mortgage restructuring. For a variety of reasons, as previously mentioned, not every delinquent mortgage can be successfully restructured, leaving Goldman no choice but to foreclose on the mortgage or simply abandon the property.

According to the article, Goldman already “has foreclosed on many of the loans it has acquired.”  More foreclosures are likely, especially if housing prices weaken in some markets or the economy slides into another recession.

When foreclosing, Goldman faces the challenge other mortgage lenders face — the lengthy and costly foreclosure process in some states. According to one source, the five states with the longest foreclosure timelines are New Jersey, New York, Florida, Hawaii, and Illinois.

Even when a foreclosure is justified, the public-relations effect can be damaging to the reputation of the entity undertaking the foreclosure. Presumably, Goldman fully appreciates that reputational risk and is prepared to deal with it.

Potentially compounding the damage to its reputation from these foreclosures, or negative news related to this mortgage restructuring endeavor, is the fact that at least six Goldman Sachs alumni are now working at senior levels in the Trump administration. Critics almost certainly would draw that linkage should Goldman’s restructuring or foreclosure activities become controversial.

Despite these risks, buying and restructuring theses mortgages could generate goodwill for Goldman while reducing the cost of its government settlement. Time will tell.

 

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system, and the growing federalization of credit risk.


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