Goldman Sachs fine from DOJ and current low NPL inventory

12 Replies

I recently attended the Note Expo conference in Dallas which is annual event which provides me a basic snapshot of the landscape for distressed mortgage debt. Although most of the presentations were more operational in nature, one of the asset managers provided an excellent insight as to why we are seeing a lull in new inventory for small note investors. The presentation included the DOJ's fine for Goldman Sachs who is required to pay over $5 billion in fines from the DOJ for misconduct from the 2008 housing recession. 

What does this have to do with the shortage of inventory? Well much of the inventory that is sold off to the secondary market and should have trickled-down to us was from the GSE (Fannie and Freddie) liquidations of non performing loans over the past 12 months. Normally a subset of these assets would make their way to the smaller asset managers with whom I buy. But -- they did not.

Goldman Sachs was provided an opportunity to dissolve part of their $5B fine by the DOJ if they basically purchase NPLs and forgive part of the borrower's balance with an overall mandate to provide $1.8 billion in consumer relief. This is kind of a 'credit' against their fine. So like any opportunistic bank, GS purchased 4 of the 5 last auctions from Fannie Mae for approx. $2B to keep in house for loan mods and forgiveness to lower their fine balance. Essentially this purchase has cannibalized a large amount of NPL assets which normally would waterfall down to the smaller note investor. For more info, see the article linked below:

So I think this has contributed to the shortage of viable assets available and the increase in pricing for those that are available. Does anyone else have further thoughts on this? 


@Bob Malecki , if I hadn't already been a skeptic regarding government largesse and the benefits it gives to some big companies, I certainly would be after that sitting through that presentation. I was stunned at the free pass GS got, all while essentially stripping the market of assets for small investors. Frustrating to say the least.

@Mike Morehouse get a copy of The Creature From Jekyll Island by G. Edward Griffin and read. You will get better insights as to how the central banks manipulate our economy. Keep an empty stomach..........

Bob, thanks for this unsettling news. Seriously, I'm glad to know what's going on despite it being a big bummer. I'm just getting ready to dive into the notes biz and buy my first note (JV). With many new investors and a tightening of inventory I hope the future holds some promise.

@Bob Malecki  

After reading the Housing Wire article a couple of times, it remains unclear how many of the assets they purchased from the GSEs have been worked through.  Therefore, it is unclear if they are done buying.  Most probably, they are not done buying

It also is not clear what percent of UPB was forgiven. So, it seems we must either find additional information that may help us determine the amount that remains to be purchased.

.......or we just wait until supply rebounds, signaling that GS is done with the program.

I know.....this is not helpful.....but current status is unclear to the point of being useless.....

Thanks for the heads up as it allows us to seek out information going forward that may help us estimate when the deals will begin to flow again.

Realize that the GS sale is a bit of an anomaly, I expect inventory to improve next year, especially when GS has their appetite filled for the DOJ credits. 

@Bob Malecki  I skipped the Note Expo this year, it was on my twins birthday, again.  I think part of what is going on is just the fact that the economy is better.  More people are working and paying their bills, including mortgages so the number of properties starting FC is at a lower level.  Add to that the fact that fewer people are underwater and it means that more people who get in trouble are able to sell or short sell.

I see the lower supply and higher pricing as driven by the above and the classic credit cycle.  We are well into a recover now and debt investors are forgetting about how hard times can be during a downturn, they are buying riskier assets at higher prices to chase yield.  

There will be another recession and the market will flee from these assets again.  Until then we are holding pat with our portfolio, paying off debt, and building reserves for when we see more opportunity in the market.  When the next downturn hits cash will be king and the next group of millionaires will be minted.  

Bob is this is not just kicking the can down the road.. even with mortgage work outs and forgiveness don't u think these notes will find their way to market  at least 50% of them.. ?

@Jay Hinrichs   Good point Jay.  My experience is that a lot of people get used to not paying, it doesn't matter what the payment is, they feel entitled to free.  Anything more than that and they refuse to pay.