The purchase of Litton Loan Servicing LP from the faltering C-Bass LLC positions Goldman Sachs Group Inc. to buy and repair damaged residential assets, but it may be a good while before the Wall Street firm makes use of its new cleanup crew.
The move is one of several recent steps that Goldman — which has so far avoided the blows many of its competitors have absorbed from the mortgage meltdown — has taken to secure opportunities in a deeply distressed market.
"As this market continues to develop and as they analyze and look at ways to potentially invest in credit risk, Litton will be in a great position to support being able to operate in that product," Larry Litton Jr., the Houston servicer's chief executive, said in a brief telephone interview Wednesday.
But Goldman, which last month said it continued "to be net short" in the asset-backed markets, is guarded about the extent to which it will employ the new capacity it has in Litton Loan.
C-Bass' business model was to buy distressed home loans, securitize them, and retain the most subordinated interests and all the servicing rights. Having Litton Loan service the mortgages gave C-Bass control over their performance, and having C-Bass own the riskiest pieces of the deals was meant to give bond investors confidence.
The servicer will play much the same role for Goldman, Mr. Litton said. "We think the alignment strategy is still there. We'll be focusing on servicing credit risk that they ultimately take."
Litton Loan's ground-level vantage on the business is also an essential asset, Mr. Litton said.
"We have a lot of access to data," he said. "The feedback-loop mechanism, all those things, make sure that you can analyze credit risk appropriately, evaluate it, and make sure you mark it right."
Mr. Litton would not address the possible volume of Goldman's distressed-mortgage investments. But he said, "Any credit risk that Goldman would take, Litton will be in a great position to help them manage that credit risk by doing a great job servicing loans."
Michael DuVally, a spokesman for Goldman in New York, would not discuss its plans for Litton Loan except to say, "Given the current stress in the U.S. residential mortgage market, a premium is being placed on quality servicing capabilities for which Litton is very well known."
In a report last month, analysts at Credit Suisse Group Inc. ranked C-Bass as the most active issuer in terms of loan modifications, reporting that it modified more than 30% of loans Credit Suisse deemed in need, compared with 15% to 20% at second-place IndyMac Bancorp Inc.
At an investor conference last month, Lloyd Blankfein, Goldman's CEO, identified some other moves the company has made to seek opportunities in the downturn, including the raising of about $4.5 billion for two funds "to take advantage of distress opportunities in the credit market."
But Goldman remains bearish on mortgage-related investments, Mr. Blankfein said then. "Given that point of view, we continue to be net short in these markets … . We continue to be truly net short in these markets."
Mr. Litton said his operation may pursue contracts for third-party servicing. "As this market unwinds, and as people need access to servicing, if we think it's a transaction that we can add value in, and if we think that we've got sufficient capacity … we would absolutely be interested."
Diane Pendley, a managing director with Fitch Inc., said that Goldman has "the wherewithal, the liquidity to look into both the purchase, if that's what they decide to do" of distressed assets, "or the purchase of mortgage servicing rights," and that Litton gives it "a strong platform to put them on."
"The positive for Litton, obviously, is the financial strength" of Goldman, she said.
C-Bass, of New York, teetered on the edge of bankruptcy after it was hit by a wave of margin calls in July. Now, under a November agreement with its creditors — in which the sale of Litton was a key element — it will use monthly payments from its securities portfolio to pay down its debt over time.
MGIC Investment Corp., which with Radian Group Inc. is one of the two main investors in C-Bass, is in line with other creditors to collect on a $50 million loan in a process that "could take years," according to spokesman Mike Zimmerman.
In the scheme of things, the Litton deal is not a big investment for Goldman, which has a market capitalization of about $80 billion. According to a Radian filing with the Securities and Exchange Commission in November, Litton was to be sold for about $467.9 million under a Sept. 27 agreement.
