GS Goldman Sachs Group Inc

By Liz Hoffman and Serena Ng 

In a strange reverberation of the housing crisis, Goldman Sachs Group Inc. has become a voracious buyer of soured mortgages, trying to make money even as it looks to fulfill terms of a government settlement that calls for it to help struggling homeowners.

Over the past year-and-a-half, the Wall Street giant has become the largest buyer of severely delinquent home loans from mortgage giant Fannie Mae. The firm has acquired nearly two-thirds of $9.6 billion in loans the agency has auctioned, representing unpaid loan balances of $5.7 billion, a Wall Street Journal review of government records shows.

Goldman's buying spree has been sparked by a $5.1 billion settlement the firm entered into last year with federal and state governments over its role in packaging and selling mortgage-backed securities in the housing meltdown. As part of this, the firm agreed to provide $1.8 billion in homeowner relief.

The way it works: Goldman fixes up loans by helping borrowers get current, gets credit for doing so from regulators and hopes to sell the debt -- when people are paying consistently again -- at a profit.

But Goldman faced a unique problem. Unlike other big banks that have entered into similar agreements, such as J.P. Morgan Chase & Co. or Bank of America Corp., Goldman wasn't a big originator of home loans.

Rather, in the run-up to the housing crisis, it bought billions of dollars in mortgages and bundled them into bonds it sold to investors. It later made large bets against those same bonds and profited when the housing meltdown hit.

So Goldman lacked an inventory of mortgages to modify for its settlement. That has spurred it to buy troubled loans, according to people familiar with its purchases.

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.

Under its settlement, Goldman can fulfill its relief obligation by forgiving loan balances for struggling homeowners or reducing monthly payments. The part of the loan that is modified counts toward the settlement.

The relief Goldman agreed to provide reduced the amount of cash Goldman had to pay directly to the government as part of the overall settlement. 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 sibling, according to county records, government filings and traders.

In 2015, Fannie and Freddie began auctioning off delinquent, or "nonperforming," 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.

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 securitization-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.

That loan workout process can take one to two years, and 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 nonperforming 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. Because Goldman is purchasing loans in bulk, some aren't suitable for modification. The firm looks to foreclose those, according to people familiar with the purchases.

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

(END) Dow Jones Newswires

March 16, 2017 19:40 ET (23:40 GMT)

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