Goldman Sachs to Buy House-Flipping Lender Genesis Capital, Sources Say -- Update

Goldman Sachs Group Inc.'s push onto Main Street has taken it to small personal loans, even smaller deposit balances and a partnership with Fidelity Investments' retail brokerage customers.

The latest frontier for the Wall Street titan: house flippers.

Goldman is acquiring Genesis Capital, a private Los Angeles firm that backs investors seeking to buy, renovate and quickly sell single-family homes, according to people familiar with the matter. Genesis, founded in 2007, has been growing rapidly as the housing market continues to recover. Last year, the firm lent $1 billion, up from $50 million in 2013.

The acquisition, which could be announced as soon as this week, reflects both the buoyancy of the housing market about a decade after it last peaked and the growing interest Goldman Sachs has in diversifying its businesses as its core trading engines remain stuck in a postcrisis slump.

Wall Street firms' appetite for "fix-and-flip" loans has been growing. Volumes last year were at their highest level in a decade. In recent months, affiliates of private-equity firm Blackstone Group LP and asset manager Fortress Investment Group LLC have each acquired companies that specialize in making these credits.

Rising home prices in many large metropolitan areas combined with anemic growth in the number of new houses under construction have made house-flipping more attractive. Total housing inventory at the end of August fell 6.5% from the same month a year earlier, according to the National Association of Realtors.

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

Goldman Sachs is acquiring Genesis Capital, a private Los Angeles firm that backs investors seeking to buy, renovate and quickly sell single-family homes, according to people familiar with the matter. Genesis, founded in 2007, has been growing rapidly as the housing market continues to recover. Last year, the firm lent $1 billion, up from $50 million in 2013.

Goldman's push onto Main Street has already taken it to small personal loans, even smaller deposit balances and a partnership with Fidelity Investments' retail brokerage customers.

Taking on a firm specializing in semiprofessional house-flippers 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.

The deal though does give Goldman another place to put its growing deposit base to work. In the last two years, house flipping, once a symbol of the real-estate market's excess, has becoming hot again, fueled by a combination of resurgent home prices, venture-backed startups and Wall Street cash.

Genesis' loans, which average about $1 million, carry rates of up to 12% and run for about a year. Since 2014, they have been funded by Oaktree Capital Management, the alternative-asset giant.

Genesis will swap Oaktree's financial backing for deeper pockets at Goldman, which in recent years has launched an online-lending business named after its co-founder and bought a deposit base from GE Capital. Terms of the Goldman's deal with Genesis couldn't be determined.

Goldman has been pushing new businesses as its traditional engines of trading and banking either sputter or mature. The firm has also noted the rapid growth of financial technology and data as factors that make it easier to compete nimbly against the giant commercial banks who dominate consumer lending.

In its foray into lending, Goldman has chosen its spots carefully, avoiding areas that would put it in direct competition with the large commercial-banking rivals and focusing on niche products where there is room to grow.

Home-flipping finance, while a niche of the giant residential-mortgage market, has become a bigger business again, after falling sharply after the crisis. Investors spent $40 billion on houses with the intention of quickly reselling them last year, according to ATTOM Data Solutions, which tracks home sales.

That is the most since 2006, though about half the 2005 peak. About 35% of house-flippers today use borrowed money, a nine-year high, according to ATTOM.

It is uncommon for a bank to lend directly to house flippers, but other Wall Street firms have dabbled in business from behind the scenes. 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.

Genesis' loans will be booked through Goldman's regulated banking entity, where the firm recently began offering savings accounts and small personal loans. But because Genesis' 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.

Last year Goldman launched Marcus, an online personal-lending platform that offers a lower-cost alternative to those in credit-card debt holes. It is also teaming up with Fidelity's retail brokerage to offer loans backed by individuals' portfolios of stocks and bonds.

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

(END) Dow Jones Newswires

October 12, 2017 13:06 ET (17:06 GMT)