Four companies that were minor players – or didn’t exist during the foreclosure crisis – are involved in the ongoing effort to clean it up. They’ve purchased thousands of delinquent mortgages at a discount from Fannie Mae and Freddie Mac, which still have tens of thousands of such loans to sell at auction to get back some of the money they lost in the housing crisis. (Read: Fannie Mae, Freddie Mac and the Credit Crisis of 2008 and our tutorial: An In-Depth Look at the Credit Crisis.) The four companies are Lone Star Funds, PennyMac Loan Services, Carrington Mortgage Services and, perhaps the most interesting of the group, Goldman Sachs (GS).

When these companies buy delinquent mortgages, they can profit in three ways: They can change the loan terms through lowering interest rates, lengthening the loan term or forgiving part of the loan balance to help struggling homeowners get current, then collect homeowners’ monthly payments (option 1). They can resell the performing loans to private investors at a profit (option 2). Or (option 3), they can also foreclose on and resell the homes, which rising home prices nationwide have made possible.

These delinquent loans are so risky that big banks don’t want to buy them. In fact, the big banks have modified or sold many of their delinquent loans and are completing far fewer foreclosures than they were after the housing crisis. So why does Goldman want them?

Consumer Relief Settlements

One outcome of the foreclosure crisis is that many large banks that traded in mortgage-backed securities reached multibillion-dollar settlements with regulators that require the banks to provide consumer relief by lowering payments or lowering the loan balance for borrowers who are struggling to pay their mortgages. The amount of relief provided to each homeowner counts toward the required total settlement amount; foreclosing doesn’t count as relief. The consumer relief comes with civil penalties for banks that also reach into the billions.

Goldman is required to provide $1.8 billion in consumer relief and $2.385 billion in civil penalties. Unlike many other banks involved in regulatory settlements, however, it didn’t already have thousands of mortgages that it could restructure to help borrowers. It had to buy them first.

How Goldman Is Profiting While Providing Consumer Relief

Goldman subsidiary MTGLQ Investors, established in the early 1990s to trade credit, has grabbed headlines for buying so many distressed mortgages from Fannie Mae. The acronym MTGLQ is short for mortgage liquidation, and the subsidiary has purchased 26,000 of these loans since October 2015, spending $4.5 billion on mortgages with balances totaling $5.7 billion. These purchases make up 59% of all the mortgages Fannie has sold so far, according to an analysis of government records by the Wall Street Journal.

Goldman might be winning so many Fannie auctions because it can afford to pay more than other bidders because of the settlement credit it’s earning. Goldman has made many of its delinquent loan purchases from Fannie Mae at 70 to 80 cents on the dollar, but prices range from 50 to 90 cents on the dollar.

A recent sale, completed in mid-March of 2017, transferred three loan pools from Fannie to MTGLQ. This gives an idea of what these pools look like: One contained 3,062 loans with an unpaid principal balance of $496 million, an average loan size of $162,000 and an average loan interest rate of 5.05%, with borrowers an average of 38 months – more than three years – behind on payments. MTGLQ is also buying smaller amounts of loans from Freddie Mac and from private investors.

After MTGLQ buys distressed mortgages from Fannie Mae, it outsources the loan modification work to mortgage servicing companies. Goldman is $113 million into its $1.8 billion consumer relief obligation. MTGLQ’s potential profits on restructured loans range from 5 to 15 cents on the dollar.

Despite this, a Wall Street Journal analysis of property and court records shows that Goldman seems to favor foreclosing over loan modification. To be fair, not all loans are good candidates for modification.

MTGLQ has also attracted attention for the large increase in the number of foreclosures it completed last year – nearly 600, compared with fewer than 250 in 2015 and fewer than 100 each year in 2012 through 2014. Goldman has made about $121 million from selling the foreclosed homes. Writing for the Fiscal Times, David Dayen points out that Goldman can foreclose and earn credit toward the settlement in the same transaction in cases where there are secondary loans on the property.

This loophole gives Goldman two ways to benefit from foreclosing on certain properties and violates the spirit of the settlement.

A Punishment in Name Only

The relief and the civil fines are supposed to be a punishment for bad behavior – in Goldman’s case, “for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail,” according to a Justice Department press release about the settlement. They’re also meant to serve as an example “that no institution may inflict this type of harm on investors and the American public without serious consequences.”

Instead, the settlement may be serving as an example that the nation’s largest financial institutions can inflict serious harm on investors and the economy, earning both current and future profits in the process, with only a slap on the wrist from regulators.

In a March 21 opinion column for the Fiscal Times, Dayen writes, “The bank lied to investors about the quality of the loans that comprised these [mortgage-backed] securities, earning billions off the deception,” and the $5.1 billion settlement is “a small cut of a decade of profits.” He adds, “Doing the math reveals the ridiculousness of the Justice Department calling this a punishment ... the government sentenced Goldman Sachs to make money” ... and “‘punished’ Goldman Sachs by allowing it to profit off the same mortgage crisis it helped create.” The losses Fannie Mae is taking from selling its delinquent loans at a steep discount are really losses for the taxpayer since Fannie Mae is under government conservatorship.

Dayen suggests that the government could instead have required Goldman to pay the $5.1 billion into a homeowner relief fund that the government could have used to compensate borrowers, leading to the same outcome for homeowners while actually punishing Goldman instead of affording it a profit opportunity.

End result: Firms such as Goldman Sachs are profiting while paying their supposed penance for their role in the housing crisis.

The Bottom Line

Goldman and other banks implicated in the housing crisis are required to provide consumer relief in the form of loan modifications as part of settlements with the Justice Department. In Goldman’s case, the bank is able to profit while fulfilling its settlement terms by purchasing severely delinquent mortgages at a steep discount from Fannie Mae, then either collecting payments on the newly performing loans, selling them at a markup to private investors or foreclosing on and selling the homes that serve as collateral for the distressed loans.