In agreeing to buy the assets of ResMae Mortgage Corp. — but only as part of a prepackaged bankruptcy — Credit Suisse Group would be picking up origination capability without the liability for repurchasing bad loans.
ResMae's other creditors could balk at the plan, observers say, but the arrangement is the only viable exit strategy for many subprime lenders, and more prepackaged bankruptcies could follow.
The Brea, Calif., lender filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code on Tuesday. Steven Glouberman, ResMae's general counsel, wrote in the filing that during negotiations, "Credit Suisse required that ResMae address any balance-sheet impact of contingent claims and debt obligations." This is why "ultimately it was decided that maintaining a maximum value for ResMae's assets required that the sale be conducted … under Chapter 11." Credit Suisse would not discuss the deal; ResMae did not return calls.
Richard Gottlieb, the head of the consumer financial services practice at the Detroit law firm Dykema Gossett PLLC, said that ResMae's bankruptcy filing is just "the tip of the iceberg," because so many subprime lenders "are on the precipice" of collapse.
"All of these transactions are done in the same fashion, because no one is going to buy the liabilities," he said. "ResMae chose the only way out, which was bankruptcy, and we're probably going to see a lot more of these."
Jeff Garfinkle, a shareholder at Buchalter, Nemer, Fields & Younger LLP, a law firm that represents many subprime lenders in Orange County, Calif., said more such lenders could "cleanse their assets" through bankruptcy.
"I do foresee more subprime bankruptcy filings, but mostly they will be liquidations," he said.
He said he did not think a surge in filings would make warehouse lenders or loan buyers harden their stance.
"The market has utterly collapsed," Mr. Garfinkle said. "It's hard to see how the investors that purchase these loans could be more aggressive in demanding repurchases."
Anyone who values ResMae at more than the $19 million that Credit Suisse agreed to pay will have a chance to outbid the Zurich company. On Tuesday, Judge Kevin J. Carey of the U.S. Bankruptcy Court for Delaware ordered that the assets be auctioned. Bids are due Feb. 28.
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The lender, founded by veterans of Long Beach Mortgage Corp. (now part of Washington Mutual Inc.), is owned Thomas H. Lee Partners LP, a Boston buyout firm, and Putnam Investments. Loan production grew from $540 million in 2003 to $8 billion last year.
Though it turned "a small profit" for the first nine months of last year, it received $520 million of repurchase requests from Merrill Lynch & Co. that "crippled … operations," Mr. Glouberman wrote. ResMae did not consider itself liable for most of the loans because a three-month sunset provision on many claims had lapsed.
William Haldin, a spokesman for Merrill, wrote in an e-mail: "Our contracts with ResMae specifically permitted us to return loans with early defaults. … We properly exercised our contractual rights to protect our financial interests."
