Goldman To Lend To House Flippers -- WSJ

By Liz Hoffman and Peter Rudegeair Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 13, 2017).

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Goldman Sachs Group Inc.'s push to lend more has taken it to some strange places for a storied, elite Wall Street firm. The latest: house flipping.

Goldman is acquiring Genesis Capital LLC, a closely held Los Angeles firm that backs investors seeking to buy, spruce up and quickly sell homes. Genesis, founded in 2007, has been growing rapidly as the housing market continues to recover. It lent $1 billion last year, up from $50 million in 2013.

Goldman's interest in a small house-flipping financier reflects both the buoyancy of the residential real-estate market and the Wall Street firm's hunger for new profit engines as its core trading business remains stuck in a postcrisis slump.

Last year, Goldman launched Marcus, an online personal-lending platform that offers a lower-cost alternative for borrowers deep in credit-card debt. A new partnership with Fidelity Investments will offer Goldman loans to millions of individual brokerage accounts.

House flipping, once a symbol of the real-estate market's excess, has become hot again. Borrowers took out $40 billion of these loans in 2016, the most since 2006, when flippers rushed to capitalize on rising home prices, and in some cases fueled the mania.

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Genesis's loans average about $1 million, carry rates of as much as 12% and run for about a year. Since 2014, they have been funded by Oaktree Capital Management LP, an alternative-asset giant.

Genesis will swap Oaktree's backing for deeper pockets at Goldman, which in recent years bought a deposit base from GE Capital. Terms of Goldman's deal with Genesis weren't disclosed.

Goldman has been pushing lending as its traditional engines of trading and banking either sputter or mature. It has chosen its spots carefully, avoiding credit cards and other businesses that would put it in direct competition with large rivals and instead focusing on niche products where there is room to grow.

Buying Genesis inches Goldman closer to residential mortgages -- an area executives have eyed warily, mindful of the public-relations and regulatory drubbing the firm took during the financial crisis for its subprime-trading activities.

Home-flipping finance, while a niche of the giant residential-mortgage market, is again a big business, after falling sharply following the crisis. About 35% of house-flippers today use borrowed money, a nine-year high, according to Attom Data Solutions, which tracks home sales.

Alex Sifakis has taken out more than 100 loans from Genesis to renovate and sell homes in and around Jacksonville, Fla. Mr. Sifakis, 34 years old, got into the business in 2006 after attending a real-estate seminar on how to flip homes. He is now president of JWB Real Estate Capital, which has about 55 employees.

When Mr. Sifakis started borrowing from Genesis three years ago, "there were not that many lenders out there," he said. Now, rising home prices and falling inventories have attracted new lenders offering lower rates, as well as increased competition from new borrowers.

"A lot more new home flippers are coming out of the woodwork," he said. They "have seen the [TV] shows." (HGTV has become one of the fastest-growing cable-TV channels by airing shows such as "Flip or Flop.")

Banks and other large financial firms are increasingly dabbling in the business, though few as directly as Goldman will now do. Wells Fargo & Co. and J.P. Morgan Chase & Co. have extended credit lines to fix-and-flip lenders. Last year, Japanese investment bank Nomura Holdings Inc. securitized $126 million in loans from online real-estate lender LendingHome Corp.

In recent months, buyers backed by Blackstone Group LP and Fortress Investment Group LLC have bought companies that specialize in these loans.

Genesis's loans will be booked through Goldman's regulated banking entity, which is looking for places to deploy its growing stash of deposits. But because Genesis's borrowers don't intend to live in the properties they buy, their loans are generally classified as commercial credits.

That exempts lenders from postcrisis rules for traditional home loans, such as collecting multiple years of borrowers' tax returns and ensuring they can afford the loan payments. Instead, lenders more heavily weight the features of the property and how much it could fetch after renovations.

Write to Liz Hoffman at liz.hoffman@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

(END) Dow Jones Newswires

October 13, 2017 02:48 ET (06:48 GMT)