Most banks hear "delinquent loans" and run. The Goldman Sachs Group Inc. (GS) is not most banks.
The massive investment bank is greedily betting that it can squeeze value out of delinquent mortgages with a multi-billion dollar purchase of auctioned loans that have unpaid loan balances of $5.7 billion. The Wall Street Journal reports that the investment bank has bought the loans over the last 18 months, and those purchases have made GS "the largest buyer of severely delinquent home loans." Goldman bought the loans entirely from Fannie Mae (FNMA), the non-government agency that offers guarantees on riskier loans in order to make mortgages more accessible to millions of Americans.
It remains uncertain how Goldman plans to profit from the mortgage purchases, but The Wall Street Journal believes the investment bank will work with borrowers to get them current on their loans. In doing this, Goldman gets credit from regulators while also positioning itself to sell the rehabilitated debt onwards for a significant profit.
The investment may remind many of the role investment banks played in the 2007/2008 Global Financial Crisis. This bet is similar in theme but dissimilar in practice. Goldman's purchases are directly tied to the debt, instead of being leveraged mortgage-backed securities (MBS) that were at the heart of the subprime mortgage meltdown that precipitated the Great Recession nearly a decade ago. Furthermore, Goldman Sachs will not re-bundle and resell the debt onwards to speculators, which was a key component in the mortgage crisis seen in America 10 years ago.
In addition to the profitable gains from rehabilitating defaulted debt, Goldman will also see its recent $5.1 billion fine from banking regulators potentially lessened following the debt purchases. According to Goldman Sachs' settlement with regulators in 2016, the bank can get a "credit" for each distressed mortgage that it owns that then go into default. All loans purchased by Goldman that do not become rehabilitated and sold for a profit will count towards that agreement and thus lower the fine Goldman will have to pay out of its own pocket.
However, The Wall Street Journal believes Goldman will most likely pursue foreclosure proceedings on most loans if it cannot recover the unpaid balances. "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," the Journal wrote.
Goldman Sachs bought 8,000 loans with $1.4 billion in unpaid balances in Fannie Mae's most recent mortgage auction.