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Goldman Sachs' Mortgage Straw Man

Stocks in this article: GS BAC C JPM WFC STI PNC OCN USB

NEW YORK ( TheStreet) -- The mortgage servicing settlement between Goldman Sachs (GS), Ocwen Financial (OCN) and New York State is completely meaningless, only serving to gain the state's approval of Goldman's sale of its Litton Loan Servicing unit, which was completed Thursday.

Ocwen agreed in June to purchase Litton from Goldman for $264 million in cash , and apparently the state's approval of the deal was contingent upon a settlement over "robosigning," other mortgage foreclosure concerns and loan servicing problems. A call to the New York State Banking Department requesting comment wasn't returned, while Goldman Sachs and Ocwen both declined to comment.

According to a Wall Street Journal report, Goldman Sachs agreed to forgive 25% of principal balances on 143 mortgage loans to borrowers in New York, or $13 million of a total principal balance of $52 million.

That's a drop in the bucket for Goldman, and has absolutely no bearing on what the eventual settlement between the largest U.S. mortgage servicers, including Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and Ally Financial, the 50 state attorneys general and federal regulators might look like, since most of the loans involved with the robosigning controversy, are securitized.

Investors holding mortgage-backed securities backed in part by nonperforming mortgages -- some of which may have violated the originators' own underwriting guidelines -- are unlikely to be enthused at the prospect of a 25% haircut on their investments.

To consider just how unlikely it would be for investors to agree to similar principal reductions, consider that the five servicers named above reported a total of $221.9 billion in one-to-four family mortgage loans serviced for others that were past due 90 days or more as of June 30. There were another $55.5 billion in one-to-fours serviced for others that were past due 30 to 89 days.

Just taking a 25% haircut on the $221.9 billion would be a loss of $55.5 billion to the investors holding the mortgage paper.

The large servicers have already agreed -- through cease and desist orders with the Federal Reserve in April -- to improve communication with borrowers, better-monitor third-party service providers, "provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures," and strengthen their compliance with "state and federal laws regarding servicing, generally, and foreclosures, in particular."

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