Goldman Sachs Group Inc has moved closer to offloading Litton Loan Servicing, with Ocwen Financial Corp leading in an auction to acquire the troubled mortgage business, sources familiar with the situation said this week.

A deal, however, has not been reached yet, so talks could still fall apart.

While Litton is not a large component of Goldman's operations, divesting the business would close an unpleasant chapter for the Wall Street bank.

Goldman bought Litton in 2007 for about $430 million, hoping to glean more information about the housing market to aid its mortgage-bond trading business. Shortly after the deal closed, the subprime housing market fell into shambles.

High levels of delinquencies and foreclosures have cut into profits of many servicing businesses. In recent months, sloppy foreclosure practices have also attracted regulatory attention and bad publicity.

Goldman began considering a sale of Litton late last year, and in the first quarter it took a $220 million writedown related to the business.

In a regulatory filing, the bank said it expected to sell Litton within a year and was cooperating with requests for information from regulators and state attorneys general about its foreclosure practices as part of a nation-wide probe.

The Houston-based business could fetch up to $500 million in the auction, sources said last month. At the time these sources said Goldman was also offering 85 percent financing for the deal, which would be used to finance roughly $2.5 billion of advances.

Companies like Litton, which collect mortgage payments from borrowers and foreclose on properties, make advances to mortgage owners when a loan goes bad, to cover things like principal and interest payments.

Ocwen has been buying businesses from banks in recent months. Last May, Ocwen bought a $6.9 billion servicing portfolio from Morgan Stanley's Saxon Mortgage Services. Ocwen also bought Barclays U.S. mortgage servicing business HomEq for $1.3 billion last year.

Goldman and Ocwen declined to comment. The sources declined to be named because the sale process is not public.

Other firms that looked at buying Litton include, Carrington Holding Co, Fortress Investment Group's Nationstar, and several private equity firms, sources have previously said.

Ocwen's shares were off 0.7 percent at $11.72, while Goldman's stock was down 1.1 percent at $137.87 in early afternoon trading on the New York Stock Exchange.

(Reporting by Lauren Tara LaCapra and Paritosh Bansal; Editing by Lisa Von Ahn, Steve Orlofsky and Tim Dobbyn)

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