Judge: Mortgage firm should retain rights
Posted on Saturday, January 5, 2008
URL: http://www.nwanews.com/adg/Business/212801/
WASHINGTON — A bankruptcy judge Friday thwarted a bid by some of Wall Street’s biggest banks to force American Home Mortgage Investment Corp. to surrender its right to service $ 1. 2 billion in mortgages owned by the banks.
Judge Christopher S. Sontchi of the U. S. Bankruptcy Court in Wilmington, Del., ruled that American Home was not obligated to transfer the servicing rights to the banks. Ordering that transfer, he said, would have delivered an undeserved “windfall” to the banks.
The dispute between American Home and the banks fanned worry on Wall Street because it involved a quarrel over whether a contract between the banks and the mortgage lender constituted a “repurchase agreement.” American Home, based in Melville, N. Y., contended the contract was a “disguised secured financing,” alarming one of Wall Street’s biggest trade associations.
The Securities Industry and Financial Markets Association warned in court papers that “any decision that characterizes the American Home repo as anything other than a repo agreement... may well have farreaching negative implications for the U. S. capital markets and the increasingly fragile U. S. economy.”
Sontchi agreed that the 2006 contract, under which the banks provided funds to American Home to allow it to originate loans, was a repossession agreement that is exempt from the usual protections of bankruptcy law. That contract obligated American Home, in the event of a default, to buy back mortgages it sold to the banks.
That means the banks, including Credit Agricole SA’s Calyon unit, JP Morgan Chase and Deutsche Bank, are free to demand that American Home buy back the loans, which total $ 1. 2 billion. American Home, however, lacks the funds to buy back the loans, so the banks have been attempting to sell them to other prospective buyers.
The banks argued their ability to fetch a good price for those loans would be compromised if Sontchi didn’t order American Home to transfer the loan servicing rights to them. Sontchi balked at that, saying servicing rights were not part of the repo agreement exempt from bankruptcy-court protection.
The banks, Sontchi wrote his opinion, had the option in 2006 of paying a higher price to American Home to obtain the servicing rights. Because they did not pay that price, Sontchi said he wasn’t sympathetic to their complaint that selling the loans now could be harder without the servicing rights.
“As the [banks ] did not pay a higher price in purchasing the mortgage loans under the contract in the first instance..., the court is not particularly troubled by their receipt of a lower price,” Sontchi wrote. “Indeed, if the court were to allow otherwise, the purchasers would receive a windfall — the right to designate the servicer without paying the concomitant premium.”
American Home, once one of the country’s biggest mortgage lenders, collapsed into bankruptcy in August — a casualty of the housing slump and the credit crunch that followed. It halted its loan-origination business, laid off thousands of employees and has sold its key asset — its servicing business — for $ 500 million to billionaire investor Wilbur Ross.