Litton, Goldman’s id

By Felix Salmon
August 30, 2010
doesn't fall far from the tree:

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

The apple, it seems, doesn’t fall far from the tree:

Litton Loan Servicing received more consumer complaints than any other loan servicer in the three years through June 2010, according to the Better Business Bureau. The 794 complaints against Goldman Sachs’ Litton led Morgan Stanley’s Saxon Mortgage at 631 complaints, American Home Mortgage at 597, Ocwen at 521 and Barclay’s HomEq at 161. The BBB gave Chase, Litton and Ocwen “F” grades due to the volume of complaints filed, their failure to respond and the seriousness of many complaints. Facing a BBB investigation in 2005 prompted by excessive complaints, the BBB voted to revoke Litton’s membership, but Litton promptly resigned. “They were arrogant,” said Dan Parsons, president of the BBB’s Houston chapter. “It was all about how much money they could make.”

I’m sure that Goldman has often regretted buying Litton, but I also get the feeling that it’s kind of their painting in the attic — the place where the dark Goldman id gets its fullest and most honest expression. Lloyd Blankfein was famously passed over for a job at Goldman before getting a job as a commodities trader at its J Aron subsidiary and rising stratospherically through the ranks; I wonder whether some dark genius at Litton will similarly manage to vault up to become senior Goldman management. After all, subprime mortgage servicing is just about the only part of the financial markets which is even more arrogant than commodities trading.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
6 comments so far

So in rapid succession we have had an article on how assuming lognormal returns gives you lognormal returns, an article about how structured product CDOs invest in structured products and now the shocking news that companies are all about making money. Maybe you could write an expose about how politicians are trying to get elected?

Posted by Danny_Black | Report as abusive

No one in the right frame of mind would choose servicing (of any type) to generate a high rate of return on invested capital. Labor-intensive + workforce turnover, technology-intensive, and not to mention outside entities make hay with their own interpretation of any rules.

Given the few servicer shops I ever visited…no thanks. Origination has to be a better game to play.

Posted by McGriffen | Report as abusive

Felix,
Goldman never, not for a nanosecond regretted buying Litton. Litton is only one of many subsidiary servicers busily manufacturing bogus defaults, “credit events” that generated obscene CDS payouts for proprietary traders shorting subprime. If you’re thinking of telling me that there are Chinese walls between trading desk and subsidiary servicers, well I’ve got a really swell barge I’d like to sell you.
All the investment banks that acquired servicers in the runup to the crisis knew they could profit mightily from mortgage servicing fraud and they did. Servicers heavily influence the disposition of the collateral of any mortgage security. Those who owned and controlled servicers knew where to place their bets. What you are looking at here is the largest insider trading scheme we have ever seen.
Look at these FTC settlements on servicing fraud and ask yourself, “Who profited?”
Countrywide Home Loans Servicing – now owned by BoA – http://www.ftc.gov:80/opa/2010/06/countr ywide.shtm
EMC Mortgage Corp. – formerly Bear Stearns subsidiary, now JPMC – http://www.ftc.gov/opa/2008/09/emc.shtm
Select Portfolio Servicing – Credit Suisse subsidiary http://www.ftc.gov/fairbanks

Posted by MichelDelving | Report as abusive

Hang on a second, McGriffin. Take a look at the larger picture. Servicers live to generate and collect fees. Late fees, modification fees, assumption fees, interest on corporate advances, etc. They, in and of themselves, have little to no skin in the actual investment game – unless they choose to.

Servicers are also the gateway to virtually ALL of the information that matters to anyone. Data mining and predictive analytics galore. Specifically loan level information. If you know what an individual loan is doing you know what to expect in the future.

If you know what 5,000 loans are doing you can wager a fairly decent bet on the Street as to if/when those loans, and the REMIC in which they’re securitized, are going to tank.

And, since you’re the servicer, you are also in control of which loans, and subsequently the REMICs they make up, are going to tank by creating default situations i.e. holding current payments until past due, assessing force placed insurance when homeowner policies are already in place, etc.

I find it curious as hell that, at one point, Fairbanks Capital Corp. claimed that as much as 40% of it’s portfolio was in some phase of default. At that time, they claimed to service 750,000 loans. 40% of 750,000 is 300,000. USA/Curry v. Fairbanks class involved 281,1000 victims.

Take a quick look at p. 18 “Servicer Diversification” of the ABACUS 2007-AC1 flipbook sometime. Run the top 5 servicers’ names through Justia.com or PACER or even Google. Take a look at the sheer magnitude of litigation against them and what the actions claim. Different servicers, virtually identical claims. If you know what is going on at loan level, you know how to structure the CDO. You know how big the losses are going to be. You know how much money you stand to make on the other side of the fence.

Servicers aren’t worried about work force turn over rates. They don’t need to b/c there really is no specialized training that anyone needs going INTO at least the lower level jobs. Not even a college degree. Check out Hot Jobs or Monster sometime and see which servicers are hiring for what positions.

Servicers hold the keys to the hen house. Part of why this financial “crisis” is as big as it is is because everyone STILL refuses to acknowledge that mortgage servicers are part of the overall PROBLEM and have no interest in being part of the SOLUTION.

I cringe every time I use the word “crisis” in conjunction with this economy. “Crisis” denotes a sudden onset “surprise” to me. Something unforeseen and/or uncontrollable happening. This “crisis” is neither of those. And anyone that says that they never saw it coming is both selectively deaf and blind – but they are FAR from being dumb.

Mr. Salmon, I humbly suggest that you take a good look at the time frame that entities began deciding to bring mortgage servicers “in-house”. For the longest time, servicers were considered “third party” entities. Roughly 2004 everyone seemed to begin looking at purchasing servicing platforms. Credit Suisse took Fairbanks/SPS in ’05. GS grabbed Litton in ’07. Morgan Stanley acquired Saxon in ’06. Merrill purchased Wilshire Credit in ’04. What did they all realize 4,5,6 years ago?

Posted by Mike_Dillon | Report as abusive

Ah Mr. Dillon was so very right. I wonder what connections to data and insider trading might have been going on that will soon hit the fan?

Goldman wishes to dump Litton as a liability before the poopoo hits the proverbial fan and gets them even more soiled. I sincerely hope there are still some paper trails to follow.

Posted by hsvkitty | Report as abusive

This was very helpful. I need to learn more about law. I am very new to it. Thanks for all the tips!

William | http://www.leenandemery.com

Posted by walkerwilliam91 | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/