Servicer Vs. Hedge Fund

American Home claims that Rose, who had boasted that he invented subprime mortgage-backed securities, along with his Greenwich-based hedge funds, “are in dire straits” because of the subprime meltdown. He originally founded the Carrington entities in 2003.

Rose’s hedge fund, Carrington Investment Partners, LP, holds tranches in four pools that are the first to suffer losses. One Carrington affiliate securitized loans that were originated or acquired by another affiliate. Carrington sold off to RMBS investors all but the highest-yielding riskiest tranche — Class CE.

American Home is suing the defendants over Class CE of Carrington Mortgage Loan Trust, Series 2006-OPT1, and Class CE of Citigroup Mortgage Loan Trust Inc., series 2005-OPT1, 2005-OPT2 and 2005-OPT3. American Home became the servicer of all four transactions — which include loans from all 50 states — when it acquired Option One Mortgage Corp.’s servicing business in April 2008.

American Home services the loans under a pooling and servicing agreement that also binds the certificate holders. That agreement requires American Home to follow the advice of the CE tranche investors with respect to defaulted loans.

The plaintiff alleges that Rose and his fund, in a desperate struggle to delay the recognition of losses, have illegally carried on with a pattern of racketeering for at least two years and have no plans to stop.

The defendants are accused of concocting a scheme that would delay losses on their investments and divert income from the more senior tranches. They allegedly lied about the value of the foreclosed properties and advised American Home to offer the homes at inflated prices that generated no sales.

In addition, the plaintiff claims that Rose and Carrington deliberately dragged their feet in communications with American Home about the listing amount or potential offers on the properties. They even declined valid offers on the properties as the market was deteriorating.

A number of transactions were outlined where Carrington ignored broker price opinions and appraised values and either listed properties too high or declined market value offers.

“As a consequence of defendants’ fraudulent scheme, by late-summer 2008, the number of REO properties in the mortgage pools had become greatly distorted,” the lawsuit says.

American Home said a disproportionate share of its subprime real estate owned was from the Carrington pools.

The delay in foreclosure sales forced the Irving, Texas-based plaintiff to advance principal and interest payments to RMBS investors while no payments were being collected. Although the servicer is reimbursed for those advances when the asset is liquidated, it is not reimbursed for the cost of financing the advances.

By delaying the inevitable disposition of REOs, the defendants were able to continue receiving income from the servicing advances instead of taking their losses as the holders of the lowest priority tranche.

“Defendants’ illegal scheme has caused millions of dollars of damages to American Home and has wrongfully diverted to defendants payments that should have gone to other certificate holders,” the complaint says.

When American Home began to investigate the skewed performance on the Carrington loans, the defendants allegedly tried to silence it by sending attorney letters to the trustees for the pools alleging that American Home was trying to sell REOs below market prices. The trustees were urged to transfer the servicing to Carrington Mortgage Servicing — a unit acquired from the bankruptcy of New Century Financial Corp.

But the trustees rejected Carrington’s request.

“To this day, Rose is causing the enterprise to continue to transmit false and misleading statements and advice about the pricing of REO properties,” the complaint says.

The latest lawsuit follows a Feb. 10 lawsuit filed by Carrington Asset Holding Company LLC against American Home also in the superior court in Stamford. Attorneys for Carrington failed to respond to a request for information about that lawsuit.

American Home Mortgage Servicing, Inc., Plaintiff, – against – Bruce M. Rose; Carrington Asset Holding Company, LLC; Carrington Investment Partners, LP; Carrington Investment Partners (US), LP; and Carrington Capital Management, LLC, Defendants.
Docket No. Fst cv 09 50 10834, filed March 20, 2009, Return Date April 21, 2009 (Connecticut Superior Court Judicial District of Stamford)

CARRINGTON ASSET HOLDING COMPANY LLC, CARRINGTON INVESTMENT PARTNERS LLP, CARRINGTON CAPITAL MANAGEMENT, LLC, and STANWICH ASSET ACCEPTANCE COMPANY LLC, Plaintiffs, v. AMERICAN HOME MORTGAGE SERVICING INC.
Docket No. FST-CV-09-5010295-S, filed Feb. 10, 2009 Connecticut Superior Court Judicial District of Stamford)