To Investor Wilbur Ross
By JOSEPH REBELLO and PEG BRICKLEY - Wall Street Journal
October 11, 2007 3:01 p.m.
The planned sale of American Home Mortgage Investment Corp.'s loan-servicing business to investor Wilbur Ross has run into opposition from a phalanx of Wall Street investment banks, some of which are raising legal questions that could roil the mortgage-securitization market.
The investment banks -- including Citigroup Inc., Goldman Sachs & Co., J.P. Morgan Chase & Co. and Bear Stearns Cos. -- contend that American Home doesn't have the right to sell servicing rights to $46 billion in loans. That, they say, is because the rights are "inextricably intertwined" with loans American Home sold to the banks.
American Home said one investment bank -- Bear Stearns -- has raised questions about the scope of some routine loan-purchase-and-servicing agreements that have the potential to "erode the ability of mortgage-loan servicers, particularly those in bankruptcy, to access capital markets."
Creditors back the company, warning that a ruling for Bear Stearns "could potentially have a devastating effect on the financial markets."
In papers filed with the U.S. Bankruptcy Court in Wilmington, Del., Bear Stearns has argued that its loan-servicing rights are lumped together with loan-purchase rights under a master agreement it reached with American Home. It calls the master agreement a "securities contract," a definition that would take the servicing rights outside the jurisdiction of the bankruptcy court that has been asked to approve the sale to Ross.
American Home and its creditors contend Bear Stearns is trying to stretch the definition of securities contract too far, so that ordinary mortgage servicing contracts can be "shoehorned" into new "safe harbor" provisions in the federal bankruptcy code. Those provisions allow stockbrokers and other financial players to cancel securities deals without seeking court permission.
"Such a result would openly invite parties to securities contracts to "bankruptcy-proof" their other transactions with the debtor by including them within a "master agreement" for the purchase and sale of securities," American Home said. That, it said, would hurt mortgage lenders in bankruptcy because potential financiers would not be willing to accept servicing rights as collateral if those rights could be "eviscerated" by another financial institution.
American Home contends that mortgages and servicing rights are considered distinct pieces of property, which can be sold together or separately. It said Wall Street banks that bought loans from American Home did not buy -- or pay for -- the rights to service the loans. Now they're attempting to derail the Ross deal in an effort to get something for nothing, the company's lawyers asserted in court papers filed Wednesday.
The loan-servicing sale is up for court review Monday in the Wilmington bankruptcy court, where American Home filed for Chapter 11 protection on Aug. 6. The Melville, N.Y., company listed 81 objections to the sale on the agenda for that hearing.
Write to Joseph Rebello at firstname.lastname@example.org and Peg Brickley at email@example.com
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