United Companies Financial Corp.'s deal to sell most of its mortgage servicing assets to EMC Mortgage Corp. was a further signal of the dramatic deflation of the specialty finance business in 1999.
EMC, a unit of Bear Stearns & Co that focuses on servicing subperforming or nonperforming loans, agreed to pay $895 million for United Cos.' servicing operation, whole loan portfolio, and residual interests. The principals in the deal, which was announced last week, declined to elaborate on the price, but an analyst who covered specialty finance before companies in that sector ran into trouble in 1998 said the assets probably went at a "deep discount to book value."
United Cos., based in Baton Rouge, La., is one of many home equity and specialty mortgage lenders to run into hard times when the market for their securities dried up after the Russian debt default in 1998.
Pacific Funding Corp., Criimi Mae, and Cityscape Financial Corp. all filed for bankruptcy protection. While a number of companies failed, others such as Aames Financial of Los Angeles, and IMC Mortgage Co. - now a unit of Citigroup Inc. - found new investors.
Southern Pacific Funding Corp. of Lake Oswego, Ore., has been in bankruptcy since Oct. 1, 1998. On July 30, the bankruptcy court in Oregon appointed SPFC Liquidating Trust to settle the company's affairs, an agent for the trustee said.
Criimi Mae Inc. filed for bankruptcy protection in October 1998 and has been paring backs its operations since, while also developing a reorganization plan, a spokesman said. The company's $873 million recapitalization plan was filed with the bankruptcy court in Maryland in December; it includes new financing from Merrill Lynch Mortgage Capital Inc. and German American Capital Corp., a unit of Deutsche Bank AG.
A spokesman for Criimi Mae said additional financing from other lenders was also forthcoming, as was the selling of commercial mortgage-backed securities. Under the plan, Criimi Mae may raise equity but is not required to do so, he added.
Meanwhile, on Monday the New York Stock Exchange said it would suspend trading of the common stock of Contifinancial Corp. before the market opened today, for failure to meet minimum listing requirements. After the suspension, an application will be made to the Securities and Exchange Commission to delist the stock, the New York exchange said.
United Cos. filed for bankruptcy protection in March, listing $1.36 billion of assets and $1.23 billion of liabilities. In June it sold its loan origination business to Aegis Mortgage Corp., of Houston, Texas.
The deal with EMC will let United Cos. continue its reorganization and "maximize" its value, Lawrence J. Ramaekers, chief executive officer of United Cos., said in a press release. The transaction is expected to be complete in January but is subject to the approval of the United States Bankruptcy Court, which has given United Cos. until Jan. 26 to file its reorganization plan.
Analysts said it is increasingly tough for companies to survive as specialists in subprime lending.
"Being a public company that relies on subprime is really hard today. It's a lot easier if you're a wholly owned subsidiary," like GMAC-Residential Funding Corp., a unit of General Motors, and Equicredit Corporation of America, Bank of America's subprime unit, said Christine Clifford, a partner with David Olson Research in Columbia, Md.
Gain-on-sale accounting practices blew up in the faces of the specialists when loans were prepaid faster than expected, forcing the companies to write down residuals and assets.
Geoffrey Sanders, executive vice president and chief credit officer for Aames, said the assumptions companies used in gain-on-sale accounting were overly optimistic.
The market is tougher now, he said, because Fannie Mae and Freddie Mac are "dipping into" subprime loans as mortgage volumes slide due to higher interest rates.