Bankrupt American Home Mortgage Investment Corp. is withholding loan files on nearly $1 billion in mortgages, including escrow account records. But it doesn't have access to the escrow funds and reportedly stopped making disbursements last month.
More than 4,500 borrowers could face lapsed insurance policies and foreclosure sales while Freddie Mac could face claims from those homeowners for uncompensated losses, all due to American Home's failure to turn over servicing records, according to a series of U. S. Bankruptcy Court filings by the secondary lender.
"As of Aug. 24, 2007," according to a filing made Sept. 10, American Home "apparently ceased making advances in payment of Freddie Mac's borrowers' insurance premiums or periodic real property tax liabilities," creating an "imminent risk" of lapsed insurance policies and unpaid property tax bills.
"Our main concern," Freddie Communications Director Brad German told MortgageDaily.com, "is that the P&I payments are made."
However, until Freddie gets possession of the loan files, he said, it won't know what payments for P&I, insurance or property taxes may or may not have been made. At issue are the files on more than 4,500 loans valued at about $495 million that were being serviced by American Home for Freddie.
American Home declined to immediately comment because they had not yet seen Freddie's filing.
McLean, Va.-based Freddie noted in its filings that, on Aug. 1, it had successfully secured possession of American Home's custodial account funds in the amount of $7 million, but that without the loan files it could not pay borrowers' insurance premiums or property tax liabilities. Nor could American Home, Freddie noted, because, while American Home has the loan files, it does not have access to the necessary funds to pay those premiums and liabilities.
Freddie has been seeking, without success, to obtain the loan files from American Home since Aug. 1, when it delivered a servicing termination notice to bankrupt lender. Subsequent efforts include a complaint filed in U.S. District Court in Texas, which resulted in that court, on August 3, directing the immediate turnover of the loan files to the government sponsored enterprise, according to the Sept. 10 bankruptcy court filing.
The Melville, N.Y.-based company and its brokers are "purporting to market the Freddie Mac mortgage loan files for sale in the proposed Section 363 sale," an auction currently scheduled for Sept. 24, although American Home "has no interest in the servicing rights" because Freddie had terminated its eligibility as a seller-servicer prior to its bankruptcy filing, according to Freddie. American Home filed for protection under Chapter 11 of the U.S. Bankruptcy Code on Aug. 6.
Freddie said it terminated servicing rights because of the "deterioration" of American Home's financial condition and its failure to report and remit funds in a timely manner for repurchases of noninvestment grade mortgages and failure to meet other repurchase agreements.
A hearing on the loan files issue has been scheduled for Sept. 17 in response to a request by Freddie.
Such a battle with a servicer over loan files is not common, according to Freddie.
"Our attorneys tell us it's happened maybe a half dozen or fewer times since 1990 where the servicer pushed back or did not allow for a smooth transition to an interim servicer," said German. "It happened a few times in the '92-'94 period and the most recent was seven or eight years ago."
But Freddie isn't the only one caught in this struggle with American Home over servicing rights and loan files.
Ginnie Mae has been trying to get the return of approximately 5,800 files for loans with a value of some $459 million and is scheduled to appear with Freddie in bankruptcy court on Sept. 17, spokeswoman Gina Screen told MortgageDaily.com.
"We're concerned about the homeowner," she said. "American Home Mortgage is making it impossible for homeowners because they don't know to whom to send payments."
Deutsche Bank is "negotiating with them on certain loans," a spokeswoman told MortgageDaily.com. But she couldn't provide more information. Officials at Credit Suisse and at EMC Mortgage Corp. and its parent Bear, Stearns & Co., declined to comment.
Morgan Stanley also is known to have been in dispute over loan files with American Home but that dispute was apparently settled with an Aug. 24 court order that American Home transfer the loan files to Morgan Stanley. A Morgan Stanley spokesperson declined to comment about the number of loan files at issue or whether the transfer had taken place.