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New Idea For Banks: Getting Rid Of Exposure To Terrible Mortgages Originated Elsewhere

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Yesterday Bloomberg reported that BofA is getting out of its correspondent mortgage business. That business, if you need a little refresher, works as follows:

1. Bank of a Horrible Small Town originates a mortgage
2. BoaHST sells mortgage to BofA, repping that there’s nothing wrong with it
3. BofA sells mortgage to securitization/GSE, also repping that there’s nothing wrong with it
4. There’s something wrong with it!
5. Investors/GSE sue BofA on the reps
6. BofA tries to sue BoaHST but it’s gone out of business/gone to jail/been replaced by tumbleweed
7. BofA is sad/broke

So you could see why that would be unattractive.

Sadly, you know what might be even less attractive? Originating mortgages yourself, if you are BofA – Bloomberg notes that 27% of BofA’s outstanding rep/warranty claims are from correspondent lending, but 54% of new originations are from correspondents. That’s not apples to apples (no one knows how the current vintage will turn out) but also not encouraging work by BofA’s retail channels.

Meanwhile, in another part of town, Goldman today closed on its sale of Litton Loan Servicing, which it bought to extend its tentacles into servicing so that it could better trade mortgage securities. And then sold when that turned out to be a bit more trouble than it was worth.

You would think that only so much could go wrong with a servicing business, which doesn't really have significant credit exposure to the underlying loans. You would be wrong. In order to be allowed to get rid of Litton, Goldman had to agree to consent orders with the Fed and New York regulators acknowledging robo-signing problems, promising not to do it again, and leaving open potential monetary penalties. And this:

If Goldman Sachs re-enters the mortgage servicing business while the action is in effect, it will be required to implement enhanced corporate governance, risk-management, compliance, borrower communication, servicing and foreclosure practices comparable to what the 14 mortgage servicers are implementing.

Somehow it does not feel like Goldman is anxious to re-enter the mortgage servicing business.