FEBRUARY 11, 2009
Billionaire Wilbur Ross, who plunged into the mortgage-servicing business with a slew of acquisitions in the past year, is running into problems in a new sign of increasing stress in the business that is on the front line of the U.S. housing crisis.
American Home Mortgage Servicing Inc., an Irving, Texas, company controlled by Mr. Ross's private-equity firm, W.L. Ross & Co., was sued Tuesday in Connecticut state court by a hedge fund. The lawsuit, filed by Carrington Capital Management LLC, alleges that the servicing unit improperly unleashed a flood of home sales in November and December to help repay $200 million of debt.
American Home Mortgage Chief Executive David M. Friedman said in a statement that the company's lawyers as of Tuesday afternoon hadn't verified that the suit was filed in state court or served on the company. Responding to the allegations based on a review of the suit by The Wall Street Journal emailed to American Home, Mr. Friedman said, "the fact-set that you cite is wholly incorrect and misleading and any complaint based on that fact-set is without merit."
Through a spokesman, Mr. Ross declined comment, referring calls to Mr. Friedman.
The lawsuit helps illustrate the growing influence of mortgage-servicing firms on foreclosures as government regulators try to find ways to halt the liquidations.
Until the downturn in the U.S. housing market, mortgage-servicing firms had inhabited a relatively obscure pocket of the lending industry, handling back-office duties such as collecting mortgage-loan payments, assessing late fees and working with struggling borrowers.
Now, as delinquencies force widespread modifications to loan terms, mortgage servicers are finding themselves increasingly in the spotlight. The industry also includes big banks such as Bank of America Corp. and Wells Fargo & Co. as well as a business owned by Goldman Sachs Group Inc.
At the American Securitization Conference in Las Vegas Tuesday, panelists discussed the growing number of foreclosures. Mary Coffin, a Wells Fargo executive vice president, said that servicing arms had been inundated with borrower requests to change the terms of their loans. "We have a tsunami upon us," Ms. Coffin told attendees of a servicing panel.
Foreclosures tied to subprime loans -- or those mortgages made to borrowers with sketchy credit histories -- are expected to increase sharply. More than 1.5 million homes have been foreclosed on and two million families are at risk of losing their homes, according to a report by the Center for Responsible Lending report last month.
Mr. Ross's dive into mortgage servicing dates to 2007, when his private-equity firm agreed to acquire the servicing rights of bankrupt subprime lender American Home Mortgage Investment Corp. Last year, Mr. Ross's firm purchased the Option One Mortgage Corp. servicing the business of H&R Block Inc. Earlier this year, W.L. Ross made a big move by agreeing to acquire the servicing rights to 185,000 loans from Citigroup Inc. That deal raised the number of loans American Home Mortgage services by 45%, to 575,000.
Greenwich, Conn.-based Carrington, the hedge-fund firm that filed the suit, is run by Bruce Rose, a mortgage-bond specialist who worked as a trader at Salomon Brothers. The suit focuses on investments the firm made in four slices of mortgage pools.
In total, Carrington owns $128.1 million of the bonds. The loans in the pools originally were serviced by Option One. American Home Mortgage took over the servicing rights in the spring of 2008.
After homeowners increasingly fell behind on their mortgages, American Home Mortgage stepped in to cover payments owed to bondholders, according to the lawsuit. This effectively made American Home the senior creditor on the mortgages and first in line for recouping money from foreclosure sales.
By September of last year, according to the Carrington suit, American Home Mortgage had fully tapped its $1.2 billion bank line and asked its banks to raise the borrowing limit. According to the suit, the banks, which aren't identified, not only said no, but demanded that American Home Mortgage pay back $200 million.
Carrington contends it suffered millions of dollars in damages because American Home Mortgage improperly conducted rapid-fire sales of homes within the mortgage pools at "unduly low amounts" in an effort to repay the debt. Carrington alleges it had contractual rights to direct and control the foreclosure and liquidation process and that American Home Mortgage breached its fiduciary duties. In its suit, Carrington said American Home Mortgage "began liquidating...properties at an extremely rapid rate" in what amounted to "fire sales."
Allegations that American Home Mortgage increased or accelerated foreclosures are "ludicrous," Mr. Friedman said. American Home Mortgage "complied with its contractual obligation to sell already vacated properties at current market value," he said.
According to the suit, the amount of liquidation proceeds skyrocketed from $2.05 million a month between January 2008 and October 2008 for a total of about $20.5 million, to $12.02 million in November and $23.04 million in December. According to data reviewed by the Journal and the suit, 177 homes were liquidated between Oct. 16 and Nov. 15 by American Home Mortgage. Between Nov. 16 and Dec. 15, 246 more homes were liquidated.
Sean F. O'Shea, Carrington's lawyer, said that American Home Mortgage's "self-dealing" meant that homes had been unnecessarily foreclosed upon and liquidated.
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