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Last week, The Goldman Sachs Group Inc. (GS - Analyst Report) completed the sale of Litton Loan Servicing to Ocwen Financial Corp. (OCN - Analyst Report) for $264.0 million, after getting approval from federal and New York state regulators.

Goldman has been ordered by the Fed to conduct an independent review of Litton’s foreclosures in 2009 and 2010 for investigating the extent of misconduct and negligence. Moreover, Goldman agreed to let off 25% of principal balances for stressed homeowners, who are 60 days past due on mortgage payments, at a total cost of $53 million.

Goldman will also reimburse some Litton home loan borrowers for illegal foreclosures at an indeterminate cost. The bank also agreed to pay fines imposed by government for any of Litton’s business operations that occurred before the deal.

As part of the deal, Goldman, Litton and Ocwen also agreed to the appeal of New York financial regulators to end robo-signing mortgage documents and review prior cases of paperwork mess.

Goldman inculcated the sale of Litton as the mortgage-servicing industry was under greater scrutiny for their foreclosure practices and were expected to result in the imposition of fines or other regulatory actions.

Earlier in June,Goldman announced the sale of its mortgage-servicing subsidiary, Litton Loan Servicing to Ocwen. Some of the assets of Litton are retained by Goldman, which are not reflected in the sale price.

As per the terms of the deal, Ocwen entered a new $2.47 billion loanfor servicing advances and will pay $337.4 million to retire a part of its debt, which Litton owes to Goldman. Further, Ocwen received $575 million of senior secured loan from Barclays plc (BCS - Analyst Report) in order to finance the deal.

Additionally, the transaction provided Ocwen with $41.2 billion of servicing portfolio in the form of unpaid principal balance, primarily related to non-prime residential mortgage loans. Moreover, it provided the company with the servicing platforms based in Houston and Dallas in Texas.

Houston-based Litton is among the mortgage-servicing businesses, which are cooperating with investigations carried out by 50 state attorneys general for foreclosure practices. The survey was conducted after authorities discovered that some firms are using flawed paperwork to confiscate homes.

Many large U.S. mortgage servicers including JPMorgan Chase & Co (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Citigroup Inc. (C - Analyst Report) faced the same foreclosure issues probed by state and federal regulators.

Litton was acquired in 2007 for $428 million from Credit-Based Asset Servicing and Securitization LLC, known as C-BASS, a subprime mortgage investment firm. Besides, Goldman also agreed to repay more than $916 million of Litton’s debt.

During the first quarter of 2011, Goldman reported $220 million in impairment losses and reclassified assets as held for sale, primarily related to Litton Loan Servicing. Goldman did not have any substantial impact on earnings in the second quarter of 2011 due to the combination of the sales price and the impairment losses recorded relating to Litton.

Ocwen is particular in servicing subprime mortgage loans, which were generally made to borrowers, who do not meet the requirements of Fannie Mae (FNMA) and Freddie Mac (FMCC). Ocwen acquires servicing rights by buying them from the owners of mortgage pools and also by being contracted as a servicer. Therefore, with the ongoing deterioration of home prices, the company might get more opportunities to acquire distressed servicing portfolios at low prices.

After facing a series of allegations, Goldman has witnessed some positive signs following the approval for the completion of Litton deal. However, more than a dozen big banks including Goldman have been sued by the U.S. Federal Housing Finance Agency (FHFA) for infringing commitments on the quality of mortgage securities sold to Fannie Mae and Freddie Mac during the housing bubble.

Though the FHFA did not disclose its target banks at the time of issuing subpoenas, the New York Times report has enlisted the likes of BofA, JPMorgan Chase & Co., Goldman and Deutsche Bank AG (DB - Analyst Report) as facing the impending lawsuit.

We believe the current issue coupled with allegations imposed on Goldman related to mortgage securities in the last few days will keep the stock price under pressure.

Goldman currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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