Accredited Home Lenders Holding Co., rebuffed by the private-equity firm that agreed to buy it two months ago, has turned to an unusual stopgap solution to its liquidity problems.
The San Diego subprime lender said Tuesday that it has agreed to sell about $1 billion of loans during the next two and a half months to a single buyer in an arrangement designed to reduce margin calls. If the market becomes "rational" again, Accredited said, it may repurchase the loans.
Observers said the transaction shows that even in the midst of a global financial crisis there are investors willing to take chances in certain parts of the battered subprime mortgage business (though perhaps in a more limited way than was seen a few months ago).
However, the announcement came a day after the private-equity firm Lone Star Funds of Dallas said management failures - not market conditions - are the reason it is trying to walk away from its $400 million deal to buy Accredited.
The loan buyer, which Accredited did not identify, would pay a discount to face value comparable to the advance rate offered by the company's warehouse lenders. However, unlike those lenders, this investor cannot make Accredited cough up cash should the loans decline in value.
Until mid-November, Accredited has the right to repurchase the loans at a premium to what the investor paid. "If the market improves to a rational level, our intention is to repurchase these quality loans by mid-November and sell or securitize them," James A. Konrath, Accredited's chief executive, said in a press release.
Karen Gelernt, a partner in the Cadwalader, Wickersham & Taft law firm, said this is an arrangement she has not seen in this cycle, though precedents exist for such a transaction. More typical, she said, have been asset sales to creditors at a mutually agreeable price but without the expectation of repurchase.
Mortgage lenders "have approached their potential warehouse providers with the notion of, 'OK, I don't want to mark to market in my documents anymore, because look what happens,'" Ms. Gelernt said, but they have met stiff resistance largely because of profound uncertainty about asset pricing.
Presumably, she said, the investor in the Accredited deal believes "that either the company can survive this disruption or they're comfortable owning these assets" at the discounted rate.
Scott Valentin, an analyst at Friedman, Billings, Ramsey Group Inc.'s FBR Capital Markets Corp., attributed Accredited's ability to find such a transaction partner to its reputation as a "blue chip" subprime originator - if such a description is not an "oxymoron."
Accredited said it had sold $500 million of loans on Friday under the arrangement and that the rest would be sold every two weeks as borrowers make their first payments.
If Accredited does not repurchase the loans, the investor will keep them "with limited recourse" to the company, it said, though it has created a "small holdback reserve to allow the purchaser to reject loans that do not meet certain criteria."
Despite the protection from margin calls, Accredited said the deal "will neither produce nor use any significant liquidity at the time of funding."
The company said it has another $600 million of loans funded by warehouse credit facilities and cash.
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Accredited did not return calls by press time. It has asserted that its deepening problems resulted from a broader market slide that was explicitly excluded as a basis for breaking up the merger agreement.
Lone Star disputed the notion that there is a "nonprime mortgage industry" distinct from the broader mortgage market and said that Accredited had failed to protect itself by moving away from subprime lending.
The filing also asserted that Accredited's management reckoned that the company loses 6% to 7% on every loan it produces but "nevertheless" is "going to continue to sell those money-losing loans."
Lone Star also criticized Accredited for failing to shutter its retail origination business, which it said produced "a drag of over $100 million" in annual costs, and for generally failing to cut expenses.
Accredited "has failed to take even the most perfunctory actions needed" to stay in business, Lone Star said, noting that it continued "to offer 'stated income' loans," which it said made up 43% of Accredited's portfolio.
As evidence of Accredited's flawed underwriting, Lone Star said that Societe Generale AG had rejected one-third of the loans in a $540 million portfolio it bought on July 2.
The French banking company did not return a request for comment by press time.
Friedman Billings Ramsey's Mr. Valentin noted that a number of mortgage lenders outside the subprime realm had been dragged under and said that originating conforming mortgages - the part of the industry that has been most insulated from the crisis - is distinct from Accredited's business of making unique underwriting decisions.
Lone Star's tender offer has been extended three times and is scheduled to expire on Aug. 28. Accredited's stock closed up 1.7% Tuesday at $6.55.
