Goldman offloads mortgage servicing business

Traders work on the floor of the New York Stock Exchange near the Goldman Sachs stall July 16, 2010.

NEW YORK (Reuters) - Goldman Sachs Group Inc (GS.N) agreed to sell its beleaguered mortgage servicing unit for just over $600 million, putting an end to its ill-timed 3-1/2 year foray into a controversial corner of the U.S. housing market.

Ocwen Financial Corp (OCN.N) said on Monday it would buy Goldman's Litton Loan Servicing unit for $263.7 million in cash. Ocwen also agreed to pay off $337.4 million in Litton debt to Goldman, helped by a new $575 million loan from Barclays (BARC.L), which advised Ocwen on the deal.

The deal gives Ocwen a mortgage servicing portfolio totaling $41.2 billion, mostly subprime mortgages made to U.S. borrowers with less than stellar credit. Mortgage service firms collect payments and handle foreclosures for mortgage owners or investors who hold securities backed by pools of mortgages.

In a statement, Goldman said the sale price "does not reflect certain assets that Goldman Sachs will retain." The bank declined to specify those assets.

Goldman bought Litton in 2007 for about $430 million, hoping to glean more information about the housing market to aid its mortgage-bond trading business. Shortly after the deal closed, the U.S. subprime housing market deteriorated to a far greater degree than most experts had expected.

High levels of delinquencies and foreclosures have cut into profits of many servicing businesses. In recent months, sloppy foreclosure practices also have attracted growing regulatory attention -- and reams of bad publicity.

Litton is among those companies being probed. The New York Fed said last month it was investigating whether the company failed to conduct proper reviews before denying borrowers the chance to reduce their payments under a government program.

It was the latest in a series of headaches for Goldman, which has found itself under fire on multiple fronts over its handling of mortgage operations and securitization practices,

and is now being probed by several government authorities.

SHARING THE PAIN

Ocwen said Goldman had agreed to share responsibility for fines and penalties that could result from such probes before the deal closes. It also agreed to share certain losses that could result from claims by third parties, such as investors or borrowers, in connection with its servicing business.

"We believe we have adequately reserved for any potential losses but continue to monitor the situation closely," a Goldman spokesman said.

Goldman began considering a sale of Litton late last year. After taking a $220 million writedown related to the business in the first quarter, Goldman said on Monday the deal should have no "material impact" on its second-quarter earnings.

To smooth any potential deal, Goldman told interested parties it was willing to finance a big chunk of the transaction, sources familiar with the situation told Reuters in April.

Ocwen said on Monday it would get financing for $2.47 billion of Litton's advances, payments made to mortgage owners when loans go sour to cover items like principal and interest.

Goldman can choose how much of these advances it will finance: either it takes on the bulk itself, or it takes the exposure that three other banks involved in the deal -- Barclays, Bank of America (BAC.N), and Royal Bank of Scotland (RBS.L) -- are unwilling to take on themselves.

Goldman shares closed down 1.1 percent as the U.S. stock market closed lower. Shares of Ocwen reversed earlier gains to close down 1.6 percent.

For its part, Ocwen wants to continue growing its mortgage servicing business, a source familiar with the situation said.

The source told Reuters on Monday that the Florida-based company also was likely to take a good look at Morgan Stanley's (MS.N) Saxon Mortgage Services Inc as well as Lehman Brothers' LEHMQ.PK Aurora Bank, which have similar assets.

(Reporting by Lauren Tara LaCapra, Knut Engelmann and Paritosh Bansal; editing by John Wallace, Tim Dobbyn and Carol Bishopric)