Goldman to Sell Mortgage Unit? - Analyst Blog

Goldman Sachs Group Inc. (GS) is thinking for a sale of Litton Loan Servicing LP, its mortgage servicing division, according to a report in the Financial Times. The sale would result in the closure of Goldman's business of home loan collections and foreclosing on delinquent borrowers.

The report has cited that at least one prospective buyer approached Goldman for this unit. However, the talks collapsed over the price issue and no sale is on the cards right now. According to the report, the Litton business unit is not considered as part of Goldman's traditional business activities such as investment banking and trading services.

Goldman had paid around $470 million to buy Litton in December 2007.Litton services around 320,000 subprime loans with an unpaid principal balance of $50 billion. Litton was one among the several mortgage servicers facing federal investigations over their foreclosure practices. In line with other servicers, the company had temporarily suspended its foreclosure activities in October.

Besides Goldman, Morgan Stanley (MS) and Barclays plc. (BCS) have also forayed into this business of home loan collections. But the tough market forced the companies selling these business units as their profit plunged significantly when the borrowers defaulted on the loans.

Goldman has hit the headlines several times in 2010 over charges and penalties. However, the company could post third quarter 2010 earnings per share of $2.98, significantly ahead of the Zacks Consensus Estimate of $2.29. Results reflected a strong performance in Investment Banking business and lower operating expenses. Though economic conditions were challenging, the company gained from a solid balance sheet.

Fundamentally, we expect the company to benefit from its well managed global franchise, strong capital base and leading position in investment banking, capital markets, trading, and asset management business. While the new financial regulatory reform will remain a challenge for Goldman's top line, we believe its measures to strengthen its business model while complying with such regulatory changes is encouraging.

Goldman Sachs currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we also assign a “Neutral” recommendation on the stock for the long term.

 
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