As ever-darker clouds have gathered over Goldman Sachsin recent months, its executives have relied on a consistent line of defence.
As regulators, congressional investigators and activist shareholders have accused Wall Street’s most successful investment bank of putting its interests ahead of those of its clients, Goldman’s response has been: we deal with sophisticated investors who ought to know how to look after themselves, not powerless individuals.
“We don’t have banking branches . . . we provide very few mortgages and don’t issue credit cards or loans to consumers,” is how Lloyd Blankfein, Goldman’s chief executive, summarised the bank’s modus operandi in a recent appearance before a US Senate subcommittee.
Yet, in one small corner of its domain, Goldman interacts directly with ordinary Americans. Through its wholly owned subsidiary Litton Loan Servicing, which is facing a wave of complaints from consumers, Goldman collects payments on 320,000 loans, mainly in California and Florida, with an unpaid principal balance of $50bn.
US customer complaints against mortgage servicing companies*
Value of loans being serviced
Complaints in past 36 months
|Litton Loan Servicing||$50bn||794|
|American Home Mortgage||$100bn||597|
|Source: Better Business |
When Goldman acquired Litton in December 2007 for $430m, the deal attracted little attention. Compared with Goldman’s $45bn in annual revenue, Litton is tiny. Goldman says Litton services half of 1 per cent of US mortgages.
The high-risk mortgages serviced by Litton were like the many loans Goldman – and its rivals – packaged into complex securities that plunged in value once the housing bubble burst, leading to huge losses among investors.
Goldman’s knowledge of the perilous state of the US property market, and its alleged reluctance to share it with investors, is at the centre of civil fraud charges filed by the Securities and Exchange Commission – which the bank denies – and were the focus of an 11-hour grilling of Goldman executives by Senate investigators in April.
Founded in 1988 by Larry Litton Sr in Houston after the Texas real estate bust, Litton developed expertise in collecting payments on high-risk mortgages that were near default. The company was purchased in 1996 by Credit-Based Asset Servicing and Securitization (C-Bass), which bought troubled loans from banks and used Litton to restructure them.
Because of its focus on distressed borrowers, Litton was one of the first companies to experiment with reducing interest payments for customers who had fallen behind to keep them from losing their homes. Such “loan modifications” have become common practice.
Litton’s focus on modifying loans, coupled with its relationship with C-Bass, gave it an edge over rival servicers.
Because C-Bass bought bonds that were backed by pools of mortgages, Litton had the right to modify those loans once they soured.
According to Moody’s Investors Service, Litton has retained the right to modify loans in 95 per cent of the securities backed by loans it services. In contrast, other servicers have been blocked and even sued by investors, who claim loan modifications violate the original contract terms.
“Litton has been more aggressive than some of the other servicers,” said Alan White, an assistant professor at the Valparaiso University School of Law. “It’s part of their culture.”
That approach has at times incurred the wrath of consumers. Concerned about rising complaints against the company, the Houston chapter of the Better Business Bureau conducted an investigation in 2005. “They were arrogant,” said Dan Parsons, president of the Houston chapter. “It was all about how much money they could make.”
The bureau voted to revoke the company’s membership but Litton resigned before it could act.
Larry Litton Jr, current chief executive of the servicer, told the Financial Times the resignation was prompted by a failure of the bureau to fully grasp its business strategy.
He added that Litton had long been an advocate of restructuring consumer debt.
“We do it because it’s a good financial decision for investors, but also because it’s a good outcome for consumers,” Mr Litton said.
When C-Bass ran into financial trouble in 2007, Goldman snapped up Litton. Goldman said it has extensive procedures in place to ensure that information from Litton is not used inappropriately.
A person familiar with the situation said Mr Litton did not report directly to Mr Blankfein or Goldman’s senior management, but interacted with lower-level mortgage executives.
After buying Litton, Goldman took pains to operate the company separately from its trading and advisory business and does not use Goldman branding on Litton’s marketing materials. Such distance is in keeping with Goldman’s desire to be seen as a Wall Street firm that deals with high finance only.
Many Litton customers did not realise the mortgage servicer was owned by Goldman. Marla Vasquez, a disgruntled customer in California, said she learnt about the SEC investigation from a radio broadcast. “It surprised me Goldman owns a company like this,” she said.