WILMINGTON, Del. — Creditors are challenging plans by American Home Mortgage Investment Corp. to sell an Oklahoma bank the rights to service $450 million in federally insured home loans, saying the deal is likely to cause more trouble than it's worth.
In papers filed with the U.S. Bankruptcy Court in Wilmington, the official committee representing American Home's creditors said the deal would provide just $58,000 — about $10 for each of the nearly 5,800 loans involved — to American Home. But it would allow the prospective buyer, MidFirst Bank, to file "unlimited" damage claims against the bankrupt housing lender.
Those terms, the committee said Friday in a court filing, could "severely hamper" American Home's bankruptcy liquidation and reduce the amounts it would be able to repay creditors.
Under the circumstances, it said, American Home might be better off without a sale. The committee didn't object to the sale outright, but it said that if American Home proceeds with its plan, the company should be ordered to alter the terms of the MidFirst deal.
U.S. Bankruptcy Judge Christopher Sontchi is scheduled to consider the sale proposal at a court hearing Tuesday. The creditors committee said it wants American Home to change the terms of the deal to limit the damage claims MidFirst could bring against the company. It also wants American Home to provide more "clarity" on the terms of the sale.
American Home, based in Melville, N.Y., was once one of the country's biggest mortgage lenders. The company, which collapsed into bankruptcy in August, halted its loan-origination business and is selling its servicing operations. Billionaire investor Wilbur Ross has sought to buy the biggest chunk of American Home's loan-servicing rights — covering about 197,000 loans worth at least $40 billion.
Most of the loans involved in the MidFirst deal are insured by the Department of Veterans Affairs and the Federal Housing Administration, which promotes home ownership for low- and moderate-income Americans, including minorities, and offers guarantees to lenders.
The loans are in pools guaranteed by the Government National Mortgage Association, or Ginnie Mae, an agency chartered by Congress to make sure investors in the secondary mortgage market get paid on time.
To settle a dispute with Ginnie Mae, American Home agreed to sell the servicing rights for its federally insured loans to a Ginnie Mae-approved servicer. If that isn't achieved by Nov. 1, servicing rights on the loans will revert to Ginnie Mae.
American Home said that deadline played a "large role" in its decision to sell the rights to Oklahoma City-based MidFirst, one of the largest privately held banks in the U.S. It hasn't publicly disclosed terms of the MidFirst deal, but some details have been made available to creditors and other parties involved in the case.
In court papers filed Friday, the creditors committee said it was "unclear" whether American Home would get to collect anything more than a $58,000 initial payment under the MidFirst deal. Subsequent payments are subject to conditions that would be hard for American Home to meet, the committee said.
Those conditions obligate American Home to provide "every single document related to every single loan" before it can collect more than the initial payment from MidFirst. Moreover, the committee said, the deal imposes no limit on the amount of damages MidFirst can seek for any breach of the purchase agreement. It also sets no deadline for filing damage claims, conditions that are "virtually unheard of in the bankruptcy context," the committee said.
The committee also said the deal would allow MidFirst to gain servicing rights to loans in default. The sales agreement "appears to transfer the servicing rights for certain mortgages that are 'in default,' without any consideration," it said.
The government pays up to $36,000 or more for each defaulted mortgage insured by the Department of Veterans Affairs. A default on a loan insured by the Federal Housing Administration entitles the lender to collect the unpaid balance from the government, an FHA spokesman said. All but three of the loans involved in the MidFirst sale of servicing rights also carry private mortgage insurance, according to court documents.
Under the MidFirst deal, American Home would selling servicing rights on 1,050 VA-insured loans, worth $89 million. There are 4,261 FHA loans in the servicing portfolio being sold to MidFirst, with an unpaid principal balance of about $326 million. Loans backed by the Agriculture Department's Farmers Home Administration — 403 mortgages worth $37 million — are also in the portfolio.
